Recovery still at a distance

On Friday, the company reported a 74.7 % decline in net profit to Rs 25.3 crore on a turnover of Rs 3,387 croreOn Friday, the company reported a 74.7 % decline in net profit to Rs 25.3 crore on a turn

After Crompton Greaves announced its results for the quarter ended March, the company saw a flurry of downgrades; most analysts turned bearish, with lower price targets. The earnings reported by the company were 66 per cent lower than Street expectations.

For the quarter ended March, the company reported a 74.7 per cent decline in net profit at Rs 25.3 crore, on a turnover of Rs 3,387 crore, a rise of 10 per cent year-on-year. The dismal performance was primarily due to significant erosion in margins and continued losses in international business. "We maintain our concerns regarding the overall profitability, especially recovery in overseas plant margins, which remains a key drag for the company. Also, the weak margin trends in India's power business raise fresh concerns," Amit Mahawar of Edelweiss Securities said in a recent note.

The stock, which is currently around Rs 96 levels, is discounting its FY14 estimated earnings about 10 times. On Tuesday, the stock closed at Rs 95.8, up 1.86 per cent. Though the valuations factor in most concerns and seem reasonable, analysts aren't seeing any significant recovery in earnings in the near term. They expect earnings to grow just 8-10 per cent over the next two years. Therefore, most have a 'sell' rating, with price targets of Rs 85-90 a share.

During the quarter, the company's power systems segment, which accounts for about 60 per cent of its revenue, reported a fall of 2.8 per cent in margins, led by higher proportion of low-margin systems business in the overall revenues. This is a reason why despite the revenue growth, consolidated margins fell to 2.3 per cent, against 6.9 per cent in the quarter ended March 2012. The consumer business (22 per cent of revenues) recorded 23.3 per cent growth in revenue.

The biggest worry stems from the company's foreign business, which accounts for about half its revenue. The standalone power system business reported a 7.1 per cent Ebit (earnings before interest and tax) margin on a turnover of Rs 836 crore, while the corresponding business for subsidiary companies, including foreign ones, reported a 9.6 per cent fall in the Ebit margin, on a turnover of Rs 1,224 crore.

Revenues from foreign markets didn't disappoint; high costs seem to be dampening the margins. Though the company's efforts towards restructuring its foreign business have started yielding results, any significant gain is likely to be reflected only after a quarter or two. In the quarter ended March, foreign business operating losses stood at Rs 64 crore, against Rs 130 crore in the previous quarter.

"Although the domestic power business continues to remain a laggard, Hungary has achieved Ebit level profitability in the March quarter. Also, as the restructuring of the Belgium power business is complete, we do not expect further costs. In FY14, we expect the Belgian facility to benefit from employee cost savings to the tune of Rs 100 crore, as well as better execution. This may help the company erase losses in FY14," said Yogesh Nagaonkar, head of institutional broking at Bonanza Portfolio.

Next year, one could see greater benefits of restructuring of the company's global business. Benefits of the recent correction in commodity prices should also be seen, and a strong order book should drive growth. In FY13, the company's order backlog increased to Rs 9,126 crore, against Rs 8,366 crore in FY12, indicating room for growth. However, most of these positives are priced in valuations.