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Business News/ Opinion / Online-views/  Will Crompton’s acquisitions pay off?
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Will Crompton’s acquisitions pay off?

Will Crompton’s acquisitions pay off?

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Crompton Greaves Ltd’s acquisition of Spanish company ZIV for Euro 150 million (about 960 crore) on Friday did lift investor sentiment a little. The management view is that the acquisition would immediately add to revenues and earnings, besides adding value to its power systems segment, which comprises two-thirds of Crompton’s total revenue. Further, following a conference call, analysts estimate that the acquired firm could add 4-5% to the near term earnings.

One wonders where the problem lies: in the timing of acquisitions or in a lack of management expertise in integrating overseas operations into the company. Crompton’s European acquisitions were followed by the Eurozone crisis. For example, Pauwels, a leading global entity in power systems products, was a profitable firm at the time of acquisition. A recent report by John Perinchery, analyst at Asian Market Securities Ltd says that the Belgian unit of the firm reported a loss of around 50 crore during the June quarter. The report adds “As part of the restructuring exercise, the company plans to cut 260 jobs (out of a total of 730) at the Mechelen operations and has initiated the consultation process with the Belgian Works Council for the proposed reduction." Likewise, there have been project-related losses in the US region too.

Against this backdrop, would the current ZIV acquisition shore up profit margins for Crompton? A report by Religare Institutional Research points out that the debt-free balance sheet, six months order book/sales and operating margin of 21% are positives. In fact, the power systems segment in overseas operations reported a loss (before interest and tax) for the June quarter, which may turn around with the recent acquisition. But the all-cash deal at price-earnings multiple of 12 is reckoned to be expensive by some analysts.

Fortunately, the consumer segment, which is solely a part of domestic operations, has been stable with an operating margin of around 12.5% in spite of stiff competition from the branded and unbranded segment.

Apart from that, the only bright spot in the June quarter performance- the fifth consecutive disappointing quarter- was the 59% growth in order inflows from a year back. More importantly, a significant part of these came from overseas markets. This would help meet the management guidance of 12-14% for fiscal 2013, though investor confidence will improve only with an uptick in profitability.

That said, the stock plummeted after the announcement of the June quarter results. Hence, there is low downside risk from its current market price, which discounts one-year forward earnings around 14 times. How soon the series of about ten acquisitions add value to Crompton’s core business of power systems and automation will determine investor interest in the stock.

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Published: 31 Jul 2012, 10:10 AM IST
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