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Cookie crumbles at Crompton

Cookie crumbles at Crompton
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First Published: Wed, Jul 20 2011. 11 29 PM IST
Updated: Wed, Jul 20 2011. 11 29 PM IST
Struck by a poor June quarter performance and a bleak outlook, shares of capital goods maker Crompton Greaves Ltd plummeted, losing 25% in the last two trading sessions.
Although margin pressures in the last six months had been worrisome, improved order inflows mainly on the international turf during the March quarter had raised investor expectations for a recovery. But the June quarter dashed all hopes, as margins caved in due to weak pricing ability and rising costs.
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The flagship firm of the Avantha Group posted measly growth in consolidated revenue, with no succour on account of the euro appreciation against the rupee. Instead, raw material costs as a percentage of sales shot up 500 basis points (bps), pulling down operating margins by 550 bps from a year ago. One basis point is one-hundredth of a percentage point.
Operating profit fell 38%, while net profit tanked by 50% compared with the year-ago period. Adding to the gloom is the management’s statement that weak European and Middle Eastern markets marred the consolidated performance, with no big reversal seen in the near term. Overseas subsidiaries, which contribute about 40% to the firm’s total revenue, registered an operating loss during the quarter.
Meanwhile, the domestic entity’s performance stumped analysts, with an erosion in profit margins across the board. It mirrored high raw material costs, besides rising employee costs. A puzzling development was the mere 2.2% growth in the consumer products business, which had boosted revenue with double-digit growth in the last several quarters despite adversities of Chinese competition.
Its core business—power systems—also lost ground. Consolidated operating margins of the segment hit a rock bottom 2.6%. Its industrial systems division displayed signs of weakness, too, across locations.
The quarter saw no relief coming from other income, which fell 17% from the year-ago period. Order inflows dipped 16% compared with a year ago.
The disastrous performance coincides with the retirement of its managing director S.M. Trehan, who has been credited with structural changes that were expected to catapult Crompton Greaves onto the global map of electrical equipment makers.
The Street would have perhaps been kinder in the treatment meted out to the stock, had there not been a sale of shares by Trehan and the firm’s purchase of a private jet during such troubled times.
The cookie has indeed crumbled and it may take a few quarters to put the pieces back together.
Graphic by Yogesh Kumar/Mint
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First Published: Wed, Jul 20 2011. 11 29 PM IST