After posting soaring revenue and profit numbers over the past six years, Crompton Greaves has been battered by the latest economic crisis. Buying a company jet didn’t help either
Crompton Greaves’s former managing director S M Trehan once described his company's strategy like this: “It is better to be a small fish in an ocean than a big frog in a well.”
Trehan led the company for eleven years until 2011 and under him the company grew in size and stature. A string of acquisitions followed. From 2005 onwards, Crompton Greaves (CG) acquired nine overseas companies that specialised in transformers, sub stations and electrical appliances. The company’s revenue swelled from Rs 2,200 crore in 2005 to over Rs 10,000 crore in 2011. Profits rose from Rs 120 crore to Rs 889 crore during the same period. The company got a manufacturing footprint around the globe and was thriving. It was no longer a frog in the well.
The 2012 financial year, however, changed the picture. The company's consolidated profit dipped for the first time since 2005, the year when Trehan and his team had begun expanding the company's business beyond India. Consolidated net profit for 2011-12 fell to Rs 373.59 crore, a fall of 57 per cent, and problematic when you consider the company’s increased profits even during the 2008 economic crisis. As a result, the company’s stock has fallen over 60 per cent from a high of Rs 276 last June to Rs 108.9 on Monday.
What could have gone so wrong for Crompton so quickly?
CG’s business is divided into three main segments, with the power business contributing the most (65 per cent) to the revenue, followed by consumer products (18 per cent) and industrial systems (16 per cent). The company earns nearly 55-60 per cent of the revenue from its Indian parent and the balance from its overseas subsidiaries spread across Belgium, France, the US, Canada, Germany, the UK, Indonesia and Hungary.
Overseas pain
CG’s 2012 numbers show that the company’s domestic operations reported a profit (27 per cent less as compared to 2011) but its overseas subsidiaries posted losses. This trend was evident in all quarters except Q2, when the overseas business made money.
CG's CEO Laurent Demortier blames pricing pressure and increase in commodity prices for poor results. Earlier in the year, copper and steel prices shot up, increasing manufacturing costs. These account for 40 per cent of company’s raw material costs.
At the the investor-analyst meeting last Friday, held after the result announcement, Demortier observed the price of 765 kV transformer in India had fallen from about Rs 30 crore in September 2008 to under Rs 10 crore last December. The message was clear. Input costs were going up, but due to competition, prices were down. "It (India) is a challenging market and will remain so, but I am bullish on India,'' Demortier said.
According to the company’s presentation, its power business was impacted by a slew of factors: Reduced price levels because of the entry of Chinese companies, instability in West Asia as well as the Euro zone crisis, fragmented sourcing of commodities, sub-optimal manufacturing footprint in Europe and limited capacity increase potential in India. While the company bagged nearly Rs 8,471 crore worth of orders from the sector in FY2012, profit from the power sector fell from Rs 806 crore to Rs 239 crore during the same period.
According to an equity analyst at a Mumbai-based brokerage firm, CG's employee benefit costs (salaries) are too high, as it has factories in Europe and the US. "Revenue from international subsidiaries was Rs 1,137 crore in Q4 and the company spent around Rs 300 crore on employee benefits in companies abroad. In India, it spent around Rs 90 crore,'' he added.
Crompton Greaves is not the sole Indian company to be impacted by a weak global economy. Many in the engineering space with overseas exposure have seen their business getting hit, as major economies, especially in Europe, face tough times. Indian-listed companies during the period of January to April 2012 have seen about 50 per cent reduction in new orders compared to the corresponding period last year.
For instance, Suzlon Energy, which has 80 per cent of its current orders from overseas markets, has witnessed a slowdown in fresh international business. In Europe alone, new installations of Suzlon Energy have come down from 10,980 Mw in 2010 to 10,226 Mw in 2011. Voltas, which is based largely in Gulf countries today, too, has been facing pressure in terms of procuring new orders.
China bound
Last June, Laurent Demortier took over as CEO and managing director, replacing Trehan, who became non-executive vice-chairman. Demortier, a Frenchman, spent 11 years at Alstom (CG's competitor) and has vast experience in the power sector, which forms the core of CG's business. Last week, Demortier unveiled CG's three-year strategic agenda. This includes a four-point plan to develop and sell high-value 765-kV and 1,200-kV transformers, improve sourcing of raw materials, expand manufacturing footprint, consolidate European manufacturing units and enhance sustainability of programmes to save water, paper and chemicals in factories. These measures, the company hopes, will increase its Ebitda by 450 basis points by 2015. In 2012, CG reported an Ebitda of Rs 803 crore.
China also figures prominently in Crompton's plans. "We have created a global sourcing organisation and have opened an office in China,'' Demortier told analysts. The company's consumer products division, which makes fans and lighting, is also increasing its portfolio and venturing into premium products, such as bladeless fans and appliances that sport a touch screen. "We plan to import products for our consumer business from China and are setting up a product validation centre in that country,'' he added. Company CFO Madhav Acharya had at the end of Q2 told this paper that the firm had saved about Rs 50 crore by sourcing from low-cost countries.
Demortier also disclosed that the company would invest $300 million (around Rs 1,500 crore) over the next three years to expand existing manufacturing units. He added that most of the investment will help the transformer, switch gear, drives and motor business in India, Hungary and Brazil. The company is tapping into opportunities for its industrial systems in Europe. "It (Europe) is a market where Asian companies are now accepted,'' he said. Crompton Greaves is also promoting India as an export hub.
For 2012-13, CG has declared a sales guidance of 12-14 per cent and Ebitda margin of eight-nine per cent. The company expects to increase the order inflow by 15 per cent. "We have done 15 per cent this year. We will be in the same range,'' Demortier says. The optimism is largely based on likely orders from transmission and distribution space in the US and the supply of motors to Indian Railways.
While Demortier and his team appear confident about the company's growth, analysts do not seem convinced. "The market will not give a thumbs up and investors will not be confident, if the company continues to perform poorly,'' said an equity analyst who did not wish to be named.
If this wasn't bad enough, the company's stock was further pummelled when news emerged that Trehan had sold 180,000 of his shares in the company between June and July last year. There was also anger over the company's acquisition of a private jet that was subsequently sold to Avantha group, CG's promoter company.
(With inputs from Jitendra Gupta)
