Stock Review: Crompton Greaves

Considering Crompton Greaves' current valuation and potential, investors with medium-term outlook can buy this stock

   CROMPTON Greaves has a recorded compounded growth of 40% in its net profit over the past four years on the back of domestic growth and consolidation of its overseas acquisition. Despite this, its stock traded at an average P/E of 20-25 during this period, a discount to its peers. The company follows the strategy of growth through acquisition. It has moved up the value chain from being a mere products company to a service provider. Its current P/E at 22 times on consolidated basis is lower than some of the other players and makes it an attractive proposition. Investors can consider buying the stock with a medium-term outlook.

BUSINESS:

The business of Crompton Greaves is divided into three segments; power system, industrial system and consumer products. The power system division manufactures transformers, switchgear that caters to the needs of the power sector. Industrial system caters to the needs of industries with products such as motors and alternators whereas consumer goods division is in the business of fans, light bulbs etc. The power system contributes about 65% of revenues on consolidated basis, making its business closely aligned with developments in the power sector.

   The company derives almost half of its revenues through its overseas subsidiaries, which it acquired over the past five years. Besides expanding the markets and product portfolio, acquisitions of some of these have helped it move up the value chain to cater to automation, maintenance and other service need of the sector.

 

   Among them are Microsol, UK in 2007, MSE Power, USA in 2008, Sonomatra, France in 2008 and Power Technology Solutions, UK in 2010. However, some of these companies are quite small in size. The markets in these countries are largely replacement market and are dominated by service provider rather than product supplier. Besides overseas foray, the company has been undertaking restructuring exercise in its domestic business. This includes sale of its power generation subsidiary to move out of non-engineering business and amalgamation of another subsidiary, Brook Crompton Greaves engaged in similar line of business.

   It has also acquired Nelco India, a domestic company in the railway business, all these completed in FY10. Crompton has also been very prudent with its cash management, which has helped it utilise the global phase of uncertainty to its advantage.

   Further, most of the company's debt is on the books of its subsidiaries, which provides protection to the standalone business, in case the global businesses remain subdued for an extended period.

FINANCIALS:

During the quarter ended June 2010, the company recorded a profit growth of 19% even though sales growth was modest at 5%. The profit growth was aided by lower increase in raw material and a reduction in other costs, especially in its overseas operations. Sales growth was completely contributed by the domestic business, with subsidiaries continuing to get affected by the global business environment. For the year ended March 2010, the profit growth was more than 50% with modest sales growth of 5%. The profit growth was achieved again with lower raw material cost, mainly for the subsidiaries and reduction in other costs.

   The company currently has an order book of nearly 7,000 crore, 8% higher than last year. The order intake during the quarter ended June 2010 was also quite impressive with a growth of more than 50% for the domestic business and about 20% for overseas. For the overseas business, this is a significant development as the order intake had been declining over the past few quarters.

OUTLOOK:

The outlook for the company remains strong, considering the fact that it has survived the slowdown quite well and has trimmed its non-core expenses. While the domestic growth is propelled by the expansion of power transmission system and distribution upgradation, the overseas business is expected to get traction from its positioning as total service provider. Investors with medium-term outlook can take exposure in the stock, considering its current valuation and potential.