Crompton Greaves: Powerful performance

Strong top line growth, together with lower input and interest costs, boosted profits.

With orders being executed at a faster pace, engineering major Crompton Greaves has turned in a good set of numbers for the September 2009 quarter. Revenues were up 17 per cent year-on-year at Rs 1,269 crore, driven by the power systems segment and the consumer division. The strong top line growth, together with the lower cost of raw materials, helped expand the company’s operating profit margin (stand-alone) by 330 basis points to 16.5 per cent.

While all divisions showed better profitability, analysts believe the absence of foreign exchange losses also helped. With no interest payments to speak of, the net profit jumped 47 per cent. Analysts point out that the management’s attempts to centralise buying of raw materials, as also its efforts at improving efficiency through better designs, are paying off. They also believe that the management’s strategy of pursuing only those orders that are comparatively more profitable than others has also worked.

However, while business in the home market is clearly looking up, the company’s international operations, comprising mainly Pauwels, Ganz, Microsol and MSE Power, aren’t quite out of the woods yet. With orders slow to come in, revenues for the September 2009 quarter were down by 9 per cent despite the rupee depreciating against the euro. However, a better product mix and a lower raw materials bill helped drive up margins by 180 basis points to 10.6 per cent.

Crompton’s revenue growth may be subdued in the current year, but a rise of about 15 per cent is expected in 2010-11. That should also translate into an increase in the earnings per share of around 15 per cent on a high growth of 24 per cent this year.

The stock rose 6 per cent to Rs 361 on Wednesday, but even at these levels, it trades at around 16 times estimated 2010-11 consolidated earnings and is attractively valued, given that the demand for capital goods in the home market is clearly recovering.