Crompton Greaves: Losing steam

Crompton Greaves’ international business grew by 34 per cent y-o-y in the December 2008 quarter aided partly by the depreciating rupee. This is a much slower pace than the 50 per cent seen in the first half of 2008-09. Since the US and UK markets contribute a good 40 per cent to total revenues, the downturn in the global market could hurt the growth momentum in 2009-10.

Crompton’s order book backlog grew by 31 per cent to Rs 6,500 crore at the end of December, which amounts to the total revenues earned by the firm in 2007-08. However, according to BNP Paribas, the flow of orders for international business has been slowing down — the increase in the nine months to December, it believes, was just 5 per cent y-o-y, on a constant currency basis. As such, Crompton’s subsidiaries Pauwels and Ganz, which sell mainly in the Europe and US, could find the going much tougher than they imagined some time back.

Although the EU-15 grid programme –which invests in the transmission and distribution space — will continue, investments could be smaller than expected and as such, private utilities might scale back capital expenditure.

That could lead to orders drying up for Crompton. Pauwels, for instance, has a fairly high exposure to the transformer segment which is directly linked to new construction activity and could slow down significantly. In the December 2008 quarter, Crompton’s consolidated revenues grew 25 per cent y-o-y to Rs 2,150 crore, driven by the power division which grew 28 per cent y-o-y. However, the operating profit margin was down 50 basis points to 10.5 per cent because of a foreign exchange loss.

Net profits, however, rose 48 per cent to Rs 123 crore thanks mainly to a huge fall in depreciation and also a lower tax rate of 25 per cent. Next year could be a difficult year for the company; analysts expect revenues to grow by 15 per cent while net profits are estimated to rise by 16-17 per cent.