Stock Review: Crompton Greaves

OVER RECENT years, Crompton Greaves has managed to acquire scale and product offering through acquisitions. The hunt for acquisitions is seemingly still on, with the company looking for an overseas acquisition in the automation space. The idea is to transform from aproduct company to a complete solution-provider.

The next two quarters could be challenging for the company, with power inflows remaining weak and margin pressure intensifying. However, according to CLSA, the company's domestic power business is expected to return to double-digit revenue growth from FY13, while industrial and consumer businesses should continue to grow strongly. A pick-up in transformer/sub-station awards by PowerGrid will be the positive catalyst, analysts believe.

The company's fourth quarter results were largely in line with the Street's expectations, although order inflows and operating margins remained under pressure. Net sales grew by 16 per cent on a year-on-year basis, primarily driven by the strong performance in overseas power segment. The industrial system and consumer segment, which grew by 21 per cent, 19.2 per cent and 19.6 per cent, respectively.

The power segment (standalone) witnessed a marginal de-growth of 1.1 per cent on a year-on-year basis, hampered by the depressed order inflows from domestic markets, which went down by 24 per cent during the fourth quarter and 20 per cent for FY11. Analysts like the fact that company plans to commit four per cent of its revenues towards R&D by 2015, as against the 1.5 per cent right now. It also intends to further improve its productivity through global sourcing (target to procure 57 per cent of materials from low cost countries in FY12), standardisation and better designs.

However, analysts believe the purchase of aircraft by the company could remain an overhang for the stock. Crompton's capital expenditure more than tripled in FY11 to `440 crore, partly on account of `270 crore 'investment' in an aircraft. This, coupled with higher working capital, resulted in return on equity falling from 41 per cent in FY10 to 34 per cent in FY11.