Crompton Greaves: Benefiting from restructuring efforts

Sale of automation business is key for rally to sustain

After going through a turbulent FY16, the residual capital goods business of Crompton Greaves is showing signs of strong revival.

While the March quarter results demonstrated capabilities of its power and industrials businesses (largely catering to Indian market), June quarter (Q1) results reinforced the same.

Consolidated revenues at Rs 1,424 crore expanded 39 per cent year-on-year, while the company ended Q1 with profit of Rs 40 crore against loss of Rs 64 crore a year ago. However, the number still fell short of expectations, albeit marginally.

Analysts polled on Bloomberg estimated revenues at Rs 1,437 crore and net profit at Rs 42 crore. But despite a miss in earnings, analysts aren't too worried as operations are showing strong signs of turnaround.

Crompton posted operating profit of Rs 121 crore in Q1  against loss of Rs 14 crore in last year’s quarter. Likewise, its operating margins too are inching back to earlier levels. Operating margins for Q1 stood at 8.5 per cent, while the highest clocked in recent times was 9.1 per cent.

What also re-iterates the success of the recent restructuring process is the power segment, which was ailing in terms of revenue and margin growth, and which showed stark improvement in June quarter. After the sale of its international power business, the domestic business grew 87 per cent year-on-year to post revenues of Rs 702 crore. Ebit margins for power business, which was languishing in the negative zone for many quarters, stood at 10.7 per cent in June quarter. Ebit is earnings before interest and tax.

The company's bet on industrials division, which caters to segments such as railways, has also worked well. Revenues of the industrials segment grew 11 per cent year-on-year to Rs 508 crore, while Ebit margins expanded from six per cent a year ago to 7.8 per cent in June quarter. What's equally reassuring is the improvement in its automation business (called ZIV), headquartered in Spain.

Though Crompton Greaves is in the process of divesting this segment, seven per cent revenue growth posted by ZIV in Q1 and its ability to reduce losses indicates that the management may be able to garner reasonable valuations for this business.

In fact, Renu Baid, analyst at IIFL, is of the view that further development on sale of its automation business will provide the next big trigger for the stock. This assumes importance as after the 20 per cent run-up since May, immediate upside appears capped for Crompton Greaves despite good results. A recovery in Indian economy, whenever it happens, could be another trigger.