During FY08, the overseas power system business of Crompton Greaves Ltd (CGL) reported a 28% year-on-year (y-o-y) growth in its revenues to Rs2,959.7 crore, aided by strong performance of its key subsidiaries Pauwels and Ganz.
The profit before interest and tax (PBIT) margin of the division was down 10 basis points to 6.1%, as Ganz reported loss in the last year, however the same is expected to breakeven in FY09.
The company has concluded a capital expenditure (capex) of Rs283.4 crore during the financial year. The majority of capex (Rs209 crore) has been incurred in the overseas power system business, as the company concluded acquisition of Microsol.
The return on capital employed (ROCE) of the power system division improved from 26.6% to 31.3%. However further analysis shows a significant improvement in the RoCE (62.9% in FY08 as against 43% in FY07) of the domestic power business, which led to an improvement in the entire business unit.
The debt of the consolidated entity reduced by Rs62.5 crore mainly on account of repayment of loans of the stand-alone company.
CGL continued its efficient working capital management. The working capital (net of cash) was at 27.5 days of sales vis-à-vis 30.2 days in FY07.
The management indicated that with higher capital efficiency, inventory turns and cost minimisation, the company will focus on achieving higher growth rate both organically as well as though strategic acquisition.
However, the management remained cautious on the global economy outlook and the subsequent slowdown in the demand from the USA, UK and the Euro zone.
We reiterate CGL as our top preferred pick and continue to remain upbeat about the company’s business prospects.
We recommend a BUY on the stock with a price target of Rs367. At the current market price, the stock trades at price to earnings (P/E) of 15.9x and 12.6x our FY09E and FY10E earnings respectively.