Crompton Greaves: Buy

-

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



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

Vidya Bala

Advertisement

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

Popular posts from this blog

IOB capitalises on hike in stake by LIC

-
Indian Overseas Bank rose 1.53% to Rs 46.45 at 10:31 IST on BSE, after the biggest domestic instutional investors Life Insurance Corporation of India hiked its stake in the state-run bank. The bank made this announcement after trading hours on Wednesday, 25 March 2009. Meanwhile, the BSE Sensex was up 126.19 points, or 1.31%, to 9,794.09. On BSE, 31,003 shares were traded in the counter. The stock had an average daily volume of 1.93 lakh shares in the past one quarter. The stock hit a high of Rs 47 and a low of Rs 45.95 so far during the day. The stock hit a 52-week high of Rs 156.80 on 2 May 2008 and a 52-week low of Rs 37.55 on 9 March 2009. The mid-cap bank stock had underperformed the market over the past one month till 25 March 2009, falling 3.17% as compared to the Sensex's 8.60% rise. It had also underperformed the market in the past one quarter, declining 33.94% as compared to the Sensex's 1.04% rise. The bank's current equ The current price of ...
Read more

Lok Housing & Constructions builds on fund raising plans

-
Lok Housing & Constructions jumped 6.99% to Rs 107.90 at 11:20 IST on BSE ahead of a board meeting to consider fund raising options from both foreign and local market, including an institutional placement. Meanwhile, the BSE Sensex was down 50.50 points, or 0.30%, at 15203.73. On BSE, 1.86 lakh shares were traded in the counter. The scrip had an average daily volume of 4.74 lakh shares in the past one quarter. The stock hit a high of Rs 115 and a low of Rs 102 so far during the day. The stock had a 52-week high of Rs 390.50 on 1 January 2008 and a 52-week low of Rs 96.25 on 12 June 2008. The scrip had underperformed the market over the past one month till 12 June 2008, falling 26.55% compared to the Sensex's 10.18% decline. It had also underperformed the market in the past one quarter, falling 31.39% compared to Sensex's 3.24% fall. The small-cap housing projects developer has an equity capital of Rs 42.88 crore. Face value per share is Rs 10. The current...
Read more

economic times picks

-
CMP: Rs 70.50 Target Price: Rs 90 CLSA Asia-Pacific Markets maintains an 'outperform' on Jagran Prakashan, with a 12-month price target of Rs 90. "An economic slowdown notwithstanding, improving literacy and income levels in Hindi heartland imply that drivers for Jagran's growth are still in place. With a 35% ad rate hike in 2008, Jagran continues to narrow the gap with its more expensive English rivals," the foreign brokerage said in a client note, after a Q&A reply from the management. "Rising newsprint prices have made Jagran cautious on launching new editions in FY09 and its focus this year will be profitability. While management has budgeted for a minor increase in FY10 newsprint prices, it believes that prices are likely to peak in Q2FY08 and decline thereon," it added. Neyveli Lignite CMP: Rs 117.15 Target Price: Rs 160 MERRILL Lynch has maintained its 'neutral' rating on Neyveli Lignite, with a price target of Rs 160 ...
Read more