CG: no surprises in Sep, earnings fully priced in

CG: no surprises in Sep, earnings fully priced in

For the September quarter, Crompton Greaves Ltd’s (CG) consolidated results show a revenue growth of 9.5% year-on-year (y-o-y) to 2,397.9 crore. Net profit grew 10.4% y-o-y to 213.6 crore. This rather modest growth is due to poor traction in the company’s international business, which comprises mainly power systems. Revenue from this segment grew by a mere 6.8%.

On the domestic front, as reflected in its stand-alone results, the consumer division shored up revenue with a 23.9% y-o-y jump in business to 463.4 crore. This segment accounts for merely one-third of the stand-alone revenue; its profit (before interest and tax) margin expanded by about 50 basis points (bps) on a y-o-y basis.

Also See On Expected Lines (Graphic)

On the other hand, pulling down profitability were the power and industrial segments where profit margins dipped significantly, even as revenue grew by 6% and 17%, respectively, compared to a year back.

The stand-alone entity registered a 10.5% increase in operating profit to 230.9 crore, which was in line with analysts’ expectations. Operating profit margin at around 16% for the quarter dipped by about 50 bps on a y-o-y basis, mainly due to increase in raw material costs. Net profit rose by 16.5% to 158.5 crore.

CG’s revenue and earnings momentum even at the consolidated level hinges on demand growth in its international business. With most of this accruing from Europe and the US where markets are still subdued in the power systems segment, analysts expect flattish revenue and profit growth in fiscal 2011.

At the end of the June quarter, the mid-cap capital goods maker had an order book of 6,800 crore at the consolidated level; 48% of this is in the international business. The September quarter order inflows haven’t yet been announced.

With CG expecting to focus on power transmission and distribution systems, one would expect higher traction from this segment, which constitutes about 65% of the consolidated revenue. Only higher order inflows in the coming quarters will drive revenue and earnings growth, and influence the company’s share price.

CG’s shares changed hands at 321.30 on the Bombay Stock Exchange (BSE). In the last six months, it has only marginally beaten returns on the BSE Sensex and capital goods index. At the current market price, the estimated fiscal 2012 earnings are discounted and at around 19 times earnings, the stock seems fully priced.

Graphic by Yogesh Kumar/Mint

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