Crompton Greaves: Hedging revenues

The company maintained revenue growth despite currency weakness affecting European subsidiary.

Crompton Greaves was hit by a weak euro in the June quarter, with the currency depreciating by around 6.4 per cent during the period. As Europe is a key market for its subsidiaries, the seven per cent revenue rise was negated by the currency depreciation. The bid to secure the transformer business of Emerson Electric Company for a reported $400 million will hedge the company’s revenues from diversified geographies, reckon analysts.

Crompton Greaves can easily manage this amount, with around Rs 500 crore worth debt and a net worth of around Rs 2,500 crore. The move will also boost the power systems business that saw sluggish growth during the quarter. Overall revenues grew six per cent year-on-year to Rs 2,370 crore, while net earnings rose 18 per cent to Rs 190 crore. But, revenues from the power system business division slipped by around two per cent. The consumer products and the industrial systems jumped around 29 per cent and 15 per cent, respectively. Control over selling, general and administrative expenses buoyed operating profit margins by 160 basis points. Analysts at Macquarie Equities Research reckon there is room for a margin surprise in FY11 due to the cost-saving activities in the overseas. They expect a 14.6 per cent margin for FY11 compared to the management guidance of 14 per cent.

The power systems business, despite subdued revenue growth, is on a sound footing in terms of order intake. Consolidated order inflows rose 34 per cent year-on-year to Rs 2,730 crore. The current order book has an execution period of 11 months, whereas a typical order has lead time of six-seven months, point analysts. Hence, growth will not be phenomenal, but steady and consistent, they add. The prime concern will be the movement of the Euro, which has shown signs of improvement of late. The details of the Emerson deal can also prove to be a positive trigger for the stock.