Even as international business dynamics turn negative, domestic growth holds good.
Crompton Greaves’ consolidated financial performance in the March 2010 quarter was disappointing, as revenue grew marginally at 2 per cent to Rs 2,508 crore, compared to the same period a year ago. The domestic market, which grew at 19 per cent, supported the revenue stream.
The consumer products and industrial systems division aided this growth. However, international business, which accounts for around 45 per cent of total revenues, saw performance worsen, as revenues declined 19 per cent on a year-on-year basis. The company was reeling under the housing crisis, as its power distribution business, which contributes around 30 per cent to its international revenues, saw a decline.
However, operating profit margins improved, as the company managed material costs better. They grew 269 basis points to touch the 16 per cent zone. Despite lower revenues, the company managed to grow its margins by 500 basis points, as total costs were lower by 23 per cent. Overall, all three business segments — industrial systems, power systems and consumer products — contributed to margin expansion.
Consolidated net profit margins expanded 433 basis points to 12.2 per cent from 8 per cent in the previous year. The outlook for the transmission and distribution (T&D) sector is robust, with strong spending by the government and higher participation from private players in the power sector. However, competition is intensifying in the T&D segment, especially in the company’s key future focus area of the high-voltage transformer segment (400kv/765kv). Hence, sustaining high margins of 16 per cent in an expected high input-cost scenario looks difficult, say analysts.
Moreover, there are concerns over the fate of its international business, as the Eruozone crisis might take a toll on revenue growth. The stock, like its peers in the engineering and capital goods space, looks expensive at 17 times and 15 times price to estimated earnings for FY11 and FY12, respectively. Attractive acquisitions, faster recovery in developed key markets, and unlocking value from listing of its 32 per cent group power generation company Avantha power will reinforce positive outlook and lead to further re-rating.