During FY2008, 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 FY2009.
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 management has indicated that with higher capital efficiency, inventory turns and cost minimization, 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.
At the current market price, the stock trades at price to earnings (P/E) of 15.9x and 12.6x our FY2009E and FY2010E earnings respectively.
We recommend a BUY on the stock with a price target of Rs367.