Crompton Greaves: Buy

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The company's focus on improving the profitability of its acquired subsidiaries is beginning to yield the desired results.

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Acquired subsidiaries are adding muscle to the company's product profile.

Vidya Bala

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Crompton Greaves' widening product basket and inorganic growth strategies have helped the company to transition to a complete power distribution and transmission solutions provider. With this, the company appears qualified to enjoy stock valuations commanded by the major power equipment players.

At the current market price of Rs 240 , the stock trades at about 12 times its expected consolidated earnings for FY-10, which is a good discount to peers.

Investors can consider buying the stock with a two-three year perspective. With the steep correction and continuing volatility seen in the stock market, investors can buy in small lots using declines linked to broad markets to best advantage. Crompton Greaves has on an absolute basis returned 80 per cent over the last two years on the back of aggressive inorganic growth measures.

While growth potential remains strong, investors may have to temper their return expectations. A strategy of active profit booking on reaching target returns may be a prudent measure.

Improving profitability

Crompton Greaves reported a 21 per cent growth in sales and 44 per cent growth in net profits on a consolidated basis for FY-2008. There was a slowdown in topline growth due to the company executing fewer orders albeit with higher profit margins. Further, after the acquisition of cash-strapped companies such as Pauwels and Ganz, Crompton Greaves had stated that its near term focus would be to increase the operational efficiencies and reduce costs across all its businesses, especially in its overseas acquisitions.

The results are reflected in the over-2 percentage points increase in operating profit margins to 10.9 per cent in the last financial year. Return on capital employed has also increased from 26 per cent to 32 per cent for the consolidated entity.

Well-crafted turnaround strategy

Crompton crafted a two-phase strategy to improve profitability and growth. After making losses in FY-2001, the company exited unrelated businesses and ramped up presence in its industrial and consumer products segment apart from the key segment — power systems. Once the internal operating and financial metrics of the company turned around, Crompton Greaves moved to the second phase.

This involved inorganic growth plans through acquisition of global cash-starved companies which have sound business expertise. While it has successfully turned around Pauwels, Ganz is expected to move out of losses by FY-2009.

As a continuation of the inorganic growth strategy Crompton Greaves, acquired Ireland-based Microsol, which is into substation automation equipment and solutions.

More recently, it acquired a French company that provides services such as maintenance and repairs for power transformers and oil treatment and retro filling. With increasing presence in the European markets, a local servicing company may be a good strategy to retain clients.

With these recent additions, Crompton Greaves appears all set to become a complete power transmission and distribution solutions provider.

Strong product profile

Crompton Greaves, along with its subsidiaries, has been adding muscle to the product profile. Locally, the company's plant built a 765 KV/260 MVA single-phase generating transformer (the first in India) for NTPC, Sipat. For its distribution transformers, it has used Pauwels technology to develop foil wound transformers that consume less materials but with higher efficiencies. This not only suggests lowering of costs but, more importantly, effective absorption of technology and bringing about synergy.

The acquired companies too have the latest value-added products, with some of them being market leaders. Pauwels, for instance, is the leader in SLIM transformers used in wind power installations. These transformers, which link wind turbines to the grid, have become a success, especially in the European market, due to features such as lower power loss, compact size and use of recyclable materials.

Risks: While Crompton Greaves has so far been successful, especially in its inorganic growth route, challenges remain in successfully integrating all the acquisitions.

On the margin front, while the company's efforts have paid off in terms of higher profitability, steep hike in raw materials can spoil the party. While the company is hedged in material such as copper and aluminium, steel price hikes could pose a risk