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Crompton Greaves: Belgium factor hurts
Nov 8, 2012

Crompton Greaves has announced its September quarter results. The company has reported 8.1% YoY growth in topline. However, bottomline has declined by 64.0% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by about 8.1% YoY during the quarter. The rise has come in on the back of about 21.7% YoY increase in consumer products segment. However, revenues from both power systems and industrial systems segment grew at a modest pace of 1.2% YoY and 3.4% YoY respectively.
  • Operating margins contract to 4.7%, led by a 39.6% YoY fall in operating profits. Increase in staff cost and other expenses impacted the operating profitability.
  • Bottomline declined by 64.0% YoY on the back of a 39.6% YoY fall in operating profits and 85.5% YoY increase in interest expenses.
  • The unexecuted order book stood at Rs 94 bn. The company registered an order inflow of Rs 25.7 bn during the quarter.
  • The debt/equity ratio at the end September 2012 stood at 0.45x

Consolidated snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 27,055 29,242 8.1% 51,433 57,353 11.5%
Expenditure 24,796 27,877 12.4% 47,354 54,321 14.7%
Operating profit (EBDITA) 2,260 1,365 -39.6% 4,078 3,032 -25.6%
EBDITA margin (%) 8.4% 4.7%   7.9% 5.3%  
Other income 215 208 -3.4% 366 400 9.1%
Interest (net) 102 190 85.5% 212 289 36.3%
Depreciation 726 544 -25.1% 1,334 1,010 -24.3%
Profit before tax 1,646 838 -49.1% 2,899 2,133 -26.4%
Tax 463 414 -10.7% 938 859 -8.5%
Share of profit in associates (18) (10)   0 (0)  
Minority interest 1 5 381.8% 0 6 1275.0%
Profit after tax/(loss) 1,167 420 -64.0% 1,961 1,280 -34.8%
Net profit margin (%) 4.3% 1.4%   3.8% 2.2%  
No. of shares (m)         641.5  
Diluted earnings per share (Rs)         2.0  
Price to earnings ratio (x)*         24.0  
* On a 12-month trailing basis

What has driven performance in 2QFY13?
  • The 8.1% YoY growth in Crompton Greaves' (CG) consolidated sales during 2QFY13 was largely a result of strong performance in its consumer products business division. The consumer products business recorded a 21.7% YoY growth while the power systems and industrial systems division grew at a modest pace of 1.2% YoY and 3.4% YoY respectively.

    Segment-wise performance (Consolidated)
      2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Power Systems
    Revenue (Rs m) 17,611 17,819 1.2% 32,777 34,582 5.5%
    % share 65.1% 62.6%   63.7% 61.9%  
    PBIT margin 5.3% 0.6%   4.1% 1.5%  
    Consumer Products
    Revenue (Rs m) 4,801 5,844 21.7% 10,238 12,381 20.9%
    % share 17.7% 20.5%   19.9% 22.2%  
    PBIT margin 11.3% 9.5%   12.7% 11.4%  
    Industrial Systems
    Revenue (Rs m) 4,655 4,816 3.4% 8,453 8,866 4.9%
    % share 17.2% 16.9%   16.4% 15.9%  
    PBIT margin 12.0% 14.6%   12.6% 12.0%  
    Total
    Revenue (Rs m)* 27,068 28,479 5.2% 51,468 55,829 8.5%
    PBIT margin 7.5% 4.8%   7.2% 5.4%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company declined sharply to 4.7% in 2QFY13 from 8.4% in 2QFY12. This was mainly due to a fall in profitability at the subsidiary level. Restructuring of Belgium operations resulted in cost overruns which impacted the overseas profitability.

  • Net profits declined 64.0% YoY during the quarter due muted performance at the operating level fall in other income, and rise in interest expenses.

What to expect?
At the current price of Rs 114, the stock is trading at a multiple of 24 times its trailing twelve month earnings. Amidst muted performance in the current quarter, management has cut its earlier growth guidance. Now, in FY13, sales growth is expected to be 8-9% as against 12-14% targeted earlier. Also, EBITDA margins are now expected to be in the range of 5%, below from 8-9%, as guided earlier. Slowdown in European subsidiaries is expected to curtail revenue growth while restructuring costs at the Belgium plant is expected hurt margins in the second half of this fiscal. Hence, management has lowered the overall guidance for the full year.

More importantly, we believe that the overseas business is under pressure especially on the profitability front. Restructuring and cost overruns is impacting the profits there. It may be noted that the restructuring costs were 1.3 bn in 1HFY13, of which approximately Rs 0.8 bn materialized in 2QFY13. Going forward, related costs are expected to continue which indicates that the overseas business might end the year in red. While a cut in the guidance, rising competitive pressures and prevailing pricing environment in the domestic markets signify that the immediate future is not that good we believe most of the negatives are already into the price. As such, we maintain our HOLD view on the stock.

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