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Crompton Greaves: Interest, depreciation restrict profits - Views on News from Equitymaster
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  • Aug 14, 2014 - Crompton Greaves: Interest, depreciation restrict profits

Crompton Greaves: Interest, depreciation restrict profits
Aug 14, 2014

Crompton Greaves has announced first quarter results of financial year 2014-15 (1QFY15). The company has reported 8% YoY growth in topline. Net profits grew by 7% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by about 8% YoY during the quarter.
  • Operating profits grow by 19% YoY during the quarter. Operating margins grow 0.5% YoY during the quarter to 5% in 1QFY15.
  • Despite the good performance at the operating level, net profits grow just 7% YoY during the quarter.
  • The unexecuted order book stood at Rs 95.9 bn. The company registered an order inflow of approximately Rs 18.1 bn during the quarter.

Consolidated snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 31,948 34,415 7.7%
Expenditure 30,500 32,688 7.2%
Operating profit (EBDITA) 1,448 1,728 19.4%
EBDITA margin (%) 4.5% 5.0%  
Other income 353 386 9.2%
Interest (net) 201 245 21.4%
Depreciation 527 671 27.2%
Exceptional items  - -  
Profit before tax 1,072 1,198 11.8%
Tax 464 550 18.5%
Share of profit in associates (18) (8)  
Minority interest 10 (1)  
Profit after tax/(loss) 601 640 6.6%
Net profit margin (%) 1.9% 1.9%  
No. of shares (m)   626.7  
Diluted earnings per share (Rs)*   3.96  
Price to earnings ratio (x)*   50.5  
* On a trailing 12 months basis

What has driven performance in 1QFY15?
  • The revenue growth during the quarter has come in on the back of about 10% YoY increase in the power systems business. Revenues from consumer products segment also increased 7% YoY. However, revenues from industrial systems business decreased by 2% YoY. This was mainly due to delayed delivery for various orders from the railways. The management is hopeful of that by 2QFY15, most of these delays will get resolved and the deliveries made, moreover since the elections are over.

    Segment-wise performance (Consolidated)
      1QFY14 1QFY15 Change
    Power Systems
    Revenue (Rs m) 18,295 20,193 10.4%
    % share  59.1% 60.6%  
    PBIT margin 1.5% 1.8%  
    Consumer Products
    Revenue (Rs m) 8,046 8,611 7.0%
    % share  26.0% 25.8%  
    PBIT margin 11.7% 12.6%  
    Industrial Systems
    Revenue (Rs m) 4,621 4,526 -2.1%
    % share  14.9% 13.6%  
    PBIT margin 8.3% 6.8%  
    Revenue (Rs m)* 30,961 33,329 7.6%
    PBIT margin 5.0% 5.1%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company grew in 1QFY15 driven by mainly by a fall in raw material costs from 51.8% in the previous year’s quarter to 50.2% during the quarter gone by.

  • However, despite the operating profits growing at a healthy pace, increases in interest and depreciation costs by 21% YoY and 27% YoY respectively restricted the growth in net profits to just 7% YoY.
What to expect?
Crompton Greaves is going through a restructuring process to streamline its operations and stabilize profitability, especially in its international operations. We believe it shall take a while before the results are reflected in the numbers. The management has stated in a conference call that it does expect a turnaround in overseas performance before 2HFY15, and that most of them are already at the breakeven level. The domestic business is likely to see an uptick as and when the investment cycle upturn begins.

The management has indicated that the market is showing some signs of recovery. The domestic market however was an exception, and remained slow during the pre-election period. International markets have been seeing greater traction for the company. The European market continued to show signs of rebound. In fact, European orders grew by 122% YoY, Middle East orders 14% YoY, and order from South East Asia 82% YoY. Thus there were very strong order inflows from regions outside India and orders from outside India represented 57% of the total order inflow during the quarter.

At the current stock price of Rs 200, the stock is trading at a multiple of 50.5x times its TTM earnings. The valuations seem expensive considering the profitability concerns in overseas business as well as subdued growth in the domestic business. We are in the process of reviewing our FY17 estimates and view on Crompton Greaves. We shall soon update investors with a revised view, if any, and target price based on FY17 earnings. Till then, we maintain our SELL view on the stock and recommend investors avoid buying the stock at this price levels.

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