The slowdown in Europe and the appreciating rupee have been a cause for concern for Crompton Greaves Ltd (CGL). Nearly half its revenues come from international subsidiaries with significant exposure to European markets. Its consolidated results for the March quarter reflect this to some extent. Revenue grew by about 2% to Rs2507.9 crore on a year-on-year (y-o-y) basis. On a sequential basis, things have improved considerably with revenue growing by 11.6%.
Its stand-alone business grew by 20%, indicating that the domestic business offset the impact of falling revenue of its international subsidiaries. Both the consumer products and industrial systems segments in the domestic market grew by a healthy 24% on a y-o-y basis. International sales were down approximately 19%, as the high-end transformer and electrical equipment business in Europe has been slack owing to the slowdown in the continent.
Apart from slack demand, overseas operations were also hit because of a sharp appreciation of the rupee versus the euro and the British pound. But despite these odds, the company managed to improve its operating margin.
Crompton’s consolidated operating profit grew by about 22% y-o-y.
Operating profit margin expanded to 16% from 13.4% in the year-ago period. Margins improved even on a sequential basis. Back-of-the-envelope calculations suggest that margins of in the international business too increased.
According to Dhirendra Tiwari, director, research, Ambit Capital Pvt. Ltd, “The improvement in Crompton’s margins despite major headwinds is a testimony of its efficiency. During better times, margin growth can be significant and can lead to re-rating of the company’s share.”
Crompton, with annual revenues of Rs9,140 crore, has displayed an appetite for inorganic growth in the last few years, acquiring small global companies in overseas markets. It is a strong play on the transmission and distribution (power) business, increasing its hold in the high voltage segment.
However, with more players entering this space, competition could challenge future profits. This, along with the slowdown in Europe, could hamper revenue and profit growth at a consolidated level in fiscal 2011.
Due to its high exposure to international markets, analysts have lowered earnings estimates for fiscal 2011 to about Rs13 per share, implying a price-to-earnings multiple of about 17. For now, the share looks fairly valued. Only an improvement in global sales is likely to result in better valuations for the stock.
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