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Crompton Greaves: Slow signs of recovery
Oct 22, 2014

Crompton Greaves has announced second quarter results of financial year 2014-15 (2QFY15). The company has reported 6% YoY growth in topline. Net profits grew by 19% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by about 6% YoY during the quarter.
  • Operating profits grow by 4% YoY during the quarter. Operating margins contract 0.1% YoY during the quarter to 4.9% in 2QFY15.
  • Despite the dull performance at the operating level, net profits grow 19% YoY during the quarter.
  • The unexecuted order book stood at Rs 91.1 bn. The company registered an order inflow of approximately Rs 54.1 bn during the first half of FY15, up 9% YoY.

Consolidated snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 32,414 34,303 5.8% 64,361 68,719 6.8%
Expenditure 30,801 32,619 5.9% 61,301 65,307 6.5%
Operating profit (EBDITA) 1,613 1,684 4.4% 3,061 3,412 11.5%
EBDITA margin (%) 5.0% 4.9%   4.8% 5.0%  
Other income 326 455 39.6% 679 840 23.8%
Interest (net) 193 225 16.6% 395 470 19.1%
Depreciation 662 661 -0.1% 1,189 1,332 12.0%
Exceptional items  - -   - -  
Profit before tax 1,084 1,252 15.6% 2,156 2,451 13.7%
Tax 506 570 12.7% 970 1,119 15.4%
Share of profit in associates 15 14 -4.7% (3) 6 NA
Minority interest (9) (1) NA 2 (1) NA
Profit after tax/(loss) 584 696 19.1% 1,185 1,336 12.8%
Net profit margin (%) 1.8% 2.0%   1.8% 1.9%  
No. of shares (m)         626.7  
Diluted earnings per share (Rs)*         4.1  
Price to earnings ratio (x)*         45.4  
* On a trailing 12 months basis

What has driven performance in 2QFY15?
  • The revenue growth during the quarter has come in on the back of about 11% YoY increase in the consumer products business. Revenues from the power systems segment also increased 5% YoY. Revenues from industrial systems business increased at the slower pace of 3% YoY. The growth in the revenues of the consumer business has been driven mainly by a robust growth in the sales of consumer fans.

    Segment-wise performance (Consolidated)
      2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Power Systems
    Revenue (Rsm) 20,409  21,378 4.7% 38,703 41,571 7.4%
    % share  64.6% 64.0%   61.9% 62.3%  
    PBIT margin 2.0% 2.2%   1.8% 2.0%  
    Consumer Products
    Revenue (Rsm) 6,721 7,431 10.6% 14,767 16,042 8.6%
    % share  21.3% 22.2%   23.6% 24.0%  
    PBIT margin 11.4% 12.0%   11.6% 12.3%  
    IndustrialSystems
    Revenue (Rsm) 4,471 4,618 3.3% 9,092 9,144 0.6%
    % share  14.1% 13.8%   14.5% 13.7%  
    PBIT margin 7.5% 9.2%   7.9% 8.0%  
    Total
    Revenue (Rsm)* 31,601  33,427 5.8% 62,562 66,756 6.7%
    PBIT margin 4.9% 5.2%   4.9% 5.2%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company contracted in 2QFY15 driven by mainly by a rise in the cost of stocks purchased for trading from 13.9% in the previous year's quarter to 14.5% during the quarter gone by.

  • Despite the operating profits growing only marginally, flat depreciation charges along with a lowering of effective tax rates during the quarter helped the company post a growth in net profits to the tune of 19% YoY.
What to expect?
Crompton Greaves has been going through a restructuring process to streamline its operations and stabilize profitability, especially in its international operations. It shall take a while before the results are reflected in the numbers. The management has stated in a conference call that both the domestic and international markets have shown signs of recovery during the quarter gone by. The management if of the view that there should be a sustained improvement as we go forward as the railway sector and industrial sector capex is restarting if one looks at the current tendering activity in the Indian market. The company is also looking at tapping new markets outside India which have hereto been untapped by the company.

The company has also entered into an agreement during the quarter to sell a part of its land parcel in Kanjurmarg, Mumbai for Rs 3 bn. The portion being sold measures about 8 acres, and was surplus land not being used in the core business.

The board of the company has also approved the demerger of the company's consumer products division effective 1st April 2015. As per the features of the scheme, the new company's name will be Crompton Consumer Products Ltd. (CCPL). CCPL will issue to the shareholders of Crompton Greaves (CG) 3 shares for every 4 shares held in CG. The shares in the new entity will be listed on the BSE and the NSE. Upon de-merger, CG will hold 25% + 1 share in CCPL and the balance will be held directly by the shareholders of CG.

At the current stock price of Rs 188, the stock is trading at a multiple of 13.6 times our FY17 earnings estimate. Considering these valuations which are on the higher side, we maintain our SELL view on the stock and recommend investors avoid buying the stock at this price levels.

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