Crompton: In full swing

Crompton's operating profit margin compares well with bigger peers.

The highlight of Crompton Greaves' standalone fourth quarter results is that it managed to improve its operating profit margin by 171 basis points to 9.42 per cent as it managed to reduce adjusted raw material costs by 23 basis points.

It benefited from lower ferrous metal prices, which is generally a higher component of raw material costs, though higher non-ferrous metal prices would have increased costs.

Though not exactly comparable, Crompton's operating profit margin compares well with ABB's 8.64 per cent and Siemens' 10.7 per cent.

For FY06 too, standalone operating profit margin improved by 96 basis points to 9.23 per cent. Operating profit grew by 42.6 per cent for FY06 and 56.2 per cent for the last quarter.

Sales growth too was robust at 27.8 per cent for both the quarter as well as the year, driven by a better performance of the power systems division.

Higher investments in new capacities in the power sector is driving this growth. Even the consumer products business, where it makes fans and light sources, grew at 21 .7 per cent as consumer spending is on a rise.

In March 2005, it had acquired the transformer businesses of Belgium-based Pauwels group, which was integrated with the company and is reflected in the consolidated accounts.

According to the management, Pauwels' revenues were Rs 1,600 crore. After Crompton's acquisition, the Pauwels business has turned around, and has earned an operating profit margin of around 5.5 per cent, say analysts.

Pauwels is expected grow at about 15 per cent, the domestic business could grow at 25-30 per cent.

But as margins improve at Pauwels, the consolidated EPS will go up. In the domestic market, power systems is expected to grow faster than its other businesses.

The stock trades at a reasonable valuation of 18 times estimated consolidated FY07 EPS and 15 times FY08 EPS.

Torrent Pharma: Slow numbers

Though Torrent Pharma has reported improved results for the March 2006 quarter, with better domestic sales, it is mainly the low base of the previous corresponding quarter that makes the result attractive.

Though the standalone operating profit has grown 274 per cent y-o-y to Rs 10.4 crore in the last quarter, it just accounts for 8.75 per cent of FY06 operating profit.

The standalone operating profit margin stood at 6.77 per cent in the last quarter, while for the first nine months, operating margin was over 20 per cent.

No wonder then that the stock has underperformed the market - it has gained about 6.9 per cent over the past four months as compared to a 13.5 per cent gain in the Sensex.

In FY06, the standalone operating profit margin improved by 156 basis points y-o-y to 17.16 per cent, thanks to the strong performance in the first nine months with strong export growth.

Domestic sales improved by 33 per cent as demand for medications in segments such as cardiovascular and central nervous system improved.

But in its consolidated numbers, Torrent's operating profit margin fell 236 basis points to 11.17, as the margins in its international operations, including its German acquisition of Heumann Pharma in June 2005, were lower.

Though sales outside India grew by 215 per cent to Rs 430.86 crore in FY06, the consolidated operating profit was lower by 9 per cent at Rs 108.1 crore compared with the standalone operating profit in FY06.

The company is focusing on ramping up its exports business, which has gone up from 26.5 per cent of net sales in FY05 to 46 per cent last year, and deriving greater synergies from Heumann Pharma. Plus, in the domestic business it will need to bring down costs significantly to improve margins.

At about 34 times trailing 12-month earnings, the stock appears fully valued.