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Cromp. Greaves: Powering ahead - Views on News from Equitymaster

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Cromp. Greaves: Powering ahead
Oct 21, 2008

Performance summary
  • Consolidated sales grow by 33% YoY during 2QFY09, led by strong performance from the ‘power systems’ business, which has recorded growth of 35% YoY. On a standalone basis, sales and net profits have grown by 20% YoY and 25% YoY during the quarter.

  • EBIDTA margins expand by 1.2% YoY – improvement aided by a decline in the cost of purchased goods (as percentage of sales).

  • Net profits rise by 32% YoY on the back of a strong topline and operating margins performance. Sharp rise in tax expenses though pares the bottomline performance to an extent.

  • Acquires the US based MSE Power Systems Inc (engaged in EPC of high voltage electric power systems) during the quarter for an enterprise value of approx. US$ 16 m.

  • Declares an interim dividend of 70 paise per share (dividend yield of 0.4%).

Financial performance snapshot (Consolidated)
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 15,756 20,927 32.8% 30,981 41,274 33.2%
Expenditure 14,195 18,609 31.1% 28,117 36,874 31.1%
Operating profit (EBDITA) 1,561 2,318 48.5% 2,865 4,401 53.6%
Operating profit margin (%) 9.9% 11.1% 9.2% 10.7%
Other income 140 126 -10.3% 463 297 -35.9%
Interest 140 166 18.9% 317 304 -4.3%
Depreciation 292 343 17.5% 562 666 18.5%
Profit before tax 1,270 1,934 52.4% 2,449 3,728 52.3%
Tax 349 725 107.5% 636 1,292 103.0%
Minority interest 9 6 -25.9% 13 8 -39.8%
Share of profit/(loss) of associate (2) (2) -17.4% 9 (1) -114.8%
Profit after tax/(loss) 909 1,201 32.1% 1,808 2,427 34.2%
Net profit margin (%) 5.8% 5.7% 5.8% 5.9%
No. of shares 366.6 366.6
Diluted earnings per share (Rs)* 12.8
P/E ratio (x)* 13.7
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • The 33% YoY growth in Crompton Greaves’ (CG) revenues during 2QFY09 was aided by robust performance from its ‘power systems’ segment. This segment, which formed 67% of the company’s consolidated sales recorded a growth of 35% YoY. The acquisition of MSE Power Systems during the quarter has to an extent contributed to the increase for the segment. As for the consumer products business, sales grew by 24% YoY during the quarter. The industrial systems business grew by 27% YoY.

    Segment-wise performance (Consolidated)
      2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Power Systems            
    Revenue (Rs m) 11,084 14,965 35.0% 21,428 28,959 35.1%
    % share 66.4% 68.5%   65.2% 67.1%  
    PBIT margin 7.7% 8.9%   7.6% 8.6%  
    Consumer Products            
    Revenue (Rs m) 2,528 3,138 24.1% 5,544 6,909 24.6%
    % share 15.1% 14.4%   16.9% 16.0%  
    PBIT margin 11% 10.2%   10.5% 10.8%  
    Industrial Systems            
    Revenue (Rs m) 2,699 3,421 26.7% 5,269 6,673 26.6%
    % share 16.2% 15.6%   16.0% 15.5%  
    PBIT margin 17.3% 15.7%   17.5% 16.4%  
    Others            
    Revenue (Rs m) 383 334 -12.7% 603 594 -1.6%
    % share 2.3% 1.5%   1.8% 1.4%  
    PBIT margin -5.0% 12.3%   0.5% 12.8%  
    Total            
    Revenue (Rs m)* 16,694 21,858 30.9% 32,845 43,134 31.3%
    PBIT margin 9.4% 10.2%   9.5% 10.2%  
    * Excluding inter-segment adjustments

  • CG’s operating margins expanded by 2.2% YoY during 2QFY09. This was largely on the back of decline in the cost of purchased traded goods (as percentage of sales) as also a marginal decline in staff costs. Raw material costs, on the other hand, increased from 51.9% of sales in 2QFY08 to 54.5% in 2QFY09.

  • CG recorded a 32% YoY growth in consolidated net profits during 2QFY09. While this was duly aided by the expansion in operating margins, it could have been better but for a 108% YoY spike in tax outgo and a 10% decrease in other income. The company’s effective tax rate shot up to 37.5% in 2QFY09, from 27.5% in 2QFY08.

What to expect?
At the current price of Rs 167, the stock is trading at a multiple of 6.5 times our estimated consolidated FY11 earnings for the company. The management of the company has said that they are currently experiencing no slowdown in investments in the power segment in India. Though there is a slight effect on the demand in power distribution sector in Europe and the US due to the downturn in housing, the transmission sector is seeing no slowdown at all. The industrial segment is seeing a slight decrease in enquiries, but order inflows continue to remain robust. Half of the orders in this segment come for replacement, which are not likely to face pressure. The other half of the demand comes from companies spending on capex for expansion, which might decrease slightly if a slowdown were to happen.

Out of the company’s initially planned Rs 2 bn of capex, the company is taking a more cautions approach due to the uncertainty of the impending scenario and thus expects to have a capex of around Rs 1.3 to Rs 1.4 bn during the current fiscal. The management has maintained that it comfortably sees an 18% to 20% growth in its standalone revenues for the next 12 months. We maintain our positive view on the company.

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