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Crompton Greaves: Hit by high operating costs
Oct 19, 2011

Crompton Greaves has announced its financial results for the quarter ended September 2011. During 2QFY12, the company has reported 13% YoY rise in sales and 45% YoY decline in net profits. Here is our analysis of the results:

Performance summary
  • Consolidated sales rise by 13% YoY during quarter ended September 2011. The rise has come in on the back of about 12% YoY increase in power systems segment and about 29% YoY increase in industrial systems segment. However, growth in the consumer products segment was muted at about 4% YoY.
  • Operating profits decline by 32% YoY during 2QFY12 as operating costs grow by 20% YoY.
  • Significant increase in interest cost and depreciation charges during the quarter causes the bottomline to decline by about 45% YoY.
  • During 1HFY12, the company's sales increase by 9% YoY, while net profits decline by 52% YoY.

Consolidated performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 23,979 27,055 12.8% 47,001 51,433 9.4%
Expenditure 20,647 24,796 20.1% 40,695 47,354 16.4%
Operating profit (EBITDA) 3,332 2,260 -32.2% 6,306 4,078 -35.3%
EBITDA margin 13.9% 8.4%   13.4% 7.9%  
Other income 228 215 -5.6% 411 366 -10.8%
Interest 49 102 110.7% 99 212 114.7%
Depreciation 458 726 58.7% 873 1,334 52.8%
Profit before tax/(loss) 3,054 1,646 -46.1% 5,745 2,899 -49.5%
Tax 920 463 -49.6% 1713 938 -45.2%
Profit after tax/(loss) 2,134 1,183 - 4,032 1,961 -51.4%
Minority interest 0 1   -1 0  
Share of profit/ (loss) in associates 2 -18   14 0  
Net profit 2,136 1,167 -45.4% 4,044 1,961 -51.5%
Net margin 8.9% 4.4%   8.6% 3.8%  
No of shares (m)         641  
Diluted EPS (Rs)*         11.2  
P/E (times)*         12.8  
*trailing twelve month earnings

What has driven performance in 2QFY12?
  • The 12.8% YoY growth in Crompton Greaves' (CG) consolidated sales during 2QFY12 was largely a result of strong performance in its industrial systems business. The industrial systems business was the star performer of the quarter recording a 29.1% YoY growth. Even the power systems segment recorded an 11.6% YoY growth. However, revenue growth from the consumer products segment was modest at 3.6% YoY.

    Segment-wise performance (Consolidated)
      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Power Systems
    Revenue (Rs m) 15,778 17,611 11.6% 30,342 32,777 8.0%
    % share 65.7% 65.1%   64.4% 63.7%  
    PBIT margin 12.3% 5.3%   11.5% 4.1%  
    Consumer Products
    Revenue (Rs m) 4,634 4,801 3.6% 9,952 10,238 2.9%
    % share 19.3% 17.7%   21.1% 19.9%  
    PBIT margin 14.5% 11.3%   14.8% 12.7%  
    Industrial Systems
    Revenue (Rs m) 3,606 4,655 29.1% 6,816 8,453 24.0%
    % share 15.0% 17.2%   14.5% 16.4%  
    PBIT margin 19.5% 12.0%   19.1% 12.6%  
    Total
    Revenue(Rs m)* 24,019 27,068 12.7% 7,111 51,468 9.2%
    PBIT margin 13.8% 7.5%   13.3% 7.2%  
    *Excluding other activities and inter-segment adjustments

  • The company received orders worth Rs 22.6 bn during the quarter while the order backlog stood at Rs 71.2 bn.

  • CG's overall operating margins reported a sharp decline during the quarter. This was mainly due to a poor performance from all the three business segments.

  • Net profits declined 45.4% YoY during the quarter due to muted performance at the operating level coupled with rise in interest and depreciation expenses.

What to expect?
At the current price of Rs 132, the stock is trading at a multiple of 8.7 times our estimated consolidated FY14 earnings. Despite a challenging quarter, management has maintained its full year guidance. Further, it has also decided to dispose the aircraft (purchased last quarter and was a reason of fury amongst the analyst community) by third quarter of this fiscal. Going forward, while the demand environment is not expected to see any improvement, raw material pricing pressure is likely to impact margins. In light of these factors, we maintain our hold view on the stock.

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