Stock Review: Crompton Greaves

Overseas power subsidiaries have put up a strong show compared to the domestic business

Crompton Greaves results were almost in line with analysts' expectations, with no negative surprises in the September quarter. Consolidated revenues grew 9.5 per cent year-on-year (y-o-y), the highest in the past six quarters, to `2,398 crore.

The strong growth was led by a3.6 per cent rise in sales of subsidiaries, low-base effect (decline of nine per cent in the year-ago quarter) and seven per cent growth in the overseas power systems business. In euro terms, the top-line growth of subsidiaries was even stronger (17 per cent).

Standalone revenues grew about 14 per cent to `1,445 crore, aided by 24 per cent and 17.5 per cent jump in consumer products and industrial systems businesses, respectively. The domestic power systems business continued to underperform (up 6.6 per cent), though better than the 0.4 per cent rise posted in the June quarter.

Consolidated operating profit margin (OPM) remained flat around 14 per cent, as standalone OPM jumped 324 basis points (bps) to around 20 per cent (a fiveyear high), but was pulled down by a 552-bps drop in subsidiaries' OPM due to higher employee and other costs.

Going ahead, business momentum is likely to continue on the back of strong order inflows in domestic power systems, improvement in overseas power subsidiaries and traction in consumer products and industrial systems. A faster-than-expected recovery in sales in the developed markets can also provide upsides to the 2011-12 earnings.

In the medium term, the major positive triggers will be listing of Avantha Power, in which the company holds 41 per cent, and acquisitions (mainly to bridge the technological gap in industrial systems). The stock, at `320, trades at a high valuation of 20 times 2011-12 estimated earnings.