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Crompton Greaves: Margin expansion propels net - Views on News from Equitymaster
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Crompton Greaves: Margin expansion propels net
Oct 31, 2007

Performance summary
  • Standalone topline grows 11% YoY in 2QFY08, 16% YoY in 1HFY08. Growth led by industrial systems and consumer products businesses.
  • Operating margins expand by 2.6% owing to lower raw material costs (as percentage of sales).
  • Net profits grow by 83% YoY during the quarter, helped by operating margin expansion and higher other income.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 8,980 9,925 10.5% 16,996 19,718 16.0%
Expenditure 8,244 8,857 7.4% 15,539 17,605 13.3%
Operating profit (EBDITA) 736 1,068 45.2% 1,457 2,113 45.0%
Operating profit margin (%) 8.2% 10.8%   8.6% 10.7%  
Other income 94 185 96.4% 144 311 116.6%
Interest 72 60 -17.7% 125 126 0.4%
Depreciation 81 113 40.3% 181 218 20.4%
Profit before tax 677 1,081 59.6% 1,295 2,081 60.7%
Tax 270 339 25.3% 525 651 24.1%
Profit after tax/(loss) 407 742 82.5% 770 1,430 85.6%
Net profit margin (%) 4.5% 7.5%   4.5% 7.2%  
No. of shares         366.6  
Diluted earnings per share (Rs)*         7.0  
P/E ratio (x)*         62.4  
* On a trailing 12 months basis

Company background
Crompton Greaves (CG) is one of the leading players in the designing, manufacturing and marketing high technology electrical products and services related to power generation, transmission, distribution as well as executing turnkey projects. The company is organised into three business groups - Power Systems (44% of 1QFY08 sales), Industrial Systems (25%) and Consumer Products (31%). In addition to offering broad range of products, the company undertakes turnkey projects. CG exports its products to more than 60 countries. It acquired the Belgian ‘Pauwels’ in FY06 to emerge amongst the top ten transformer manufacturers in the world. It has also acquired Hungarian based Ganz, which is engaged in the manufacture of high voltage transformers and switchgears. During the period FY02 to FY07, CG grew its consolidated revenues and net profits at compounded annual rates of 30% and 113% respectively.

What has driven performance in 2QFY08?
Industrial, Consumer segments drive topline: CG’s Consumer Products and Industrial Systems were the lead drivers for the company’s 11% YoY growth in standalone sales during 2QFY08. While the former grew by 12% YoY, the latter recorded a growth of 14% YoY. As for the company’s dominant segment – Power – sales growth was lacklustre at 6% YoY during the quarter. This was largely a result of a major fire that broke out one of the company’s transformer facilities, thus disrupting production. As reported by the management, this unit earns CG around 18% of its power segment sales and the plant has restarted operations. The company expects sales from the power segment to grow by 18% to 22% during this fiscal. Considering this, we have to slightly lower our estimates for this segment’s standalone sales for FY08. As for its subsidiaries, Pauwels and Ganz, which formed around 39% and 4% respectively of CG’s consolidated sales in 1HFY08, the management expects growth to be 15% YoY and 12% YoY respectively in FY08.

Segment-wise performance (Standalone)
  2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Power Systems            
Revenue (Rs m) 4,340 4,601 6.0% 7,727 8,838 14.4%
% share 47.9% 46.1%   45.1% 44.5%  
PBIT margin 8.0% 11.9%   8.4% 11.8%  
Consumer Products            
Revenue (Rs m) 2,253 2,528 12.2% 4,911 5,544 12.9%
% share 24.9% 25.3%   28.6% 27.9%  
PBIT margin 8.2% 10.6%   9.0% 10.5%  
Industrial Systems            
Revenue (Rs m) 2,261 2,583 14.2% 4,156 5,091 22.5%
% share 25.0% 25.9%   24.2% 25.6%  
PBIT margin 13.6% 18.1%   13.8% 18.0%  
Others            
Revenue (Rs m) 198 270 36.7% 351 390 10.9%
% share 2.2% 2.7%   2.0% 2.0%  
PBIT margin -5.2% -3.1%   -2.7% -6.1%  
Total            
Revenue (Rs m)* 9,051 9,982 10.3% 17,145 19,862 15.8%
PBIT margin 9.1% 12.8%   9.7% 12.7%  
* Excluding inter-segment adjustments

Lower raw material costs aid margins: CG’s operating margins expanded by 2.6% during 2QFY08. This was largely on the back of decline in the company’s raw material costs. As a percentage of sales, these costs declined from 58% of sales in 2QFY07 to 51% in 2QFY08. Based on segments, all the three business divisions recorded margin expansion during 2QFY07.

Margin expansion, higher other income powers bottomline: CG recorded an 83% YoY growth in net profits during 2QFY08. Apart from the expansion in operating margins, substantially higher other income (96% YoY) aided this robust performance on the bottomline front. A lower effective tax rate (31.4% in 2QFY08 against 39.9% in 2QFY07) also helped this growth.

What to expect?
At the current price of Rs 440, the stock is trading at a multiple of 17.8 times our estimated consolidated FY10 earnings for the company. The 1HFY08 performance shall lead us to revise upwards our profitability estimates for the company. The strong momentum of investment in the power and industrial sectors are clearly witnessed in CG’s performance. Especially, the increased synergies wit Pauwels and integration of Ganz and Microsol shall help the company grow strongly into the future. We maintain our view on the stock from a 2 to 3 years perspective.

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