Crompton Greaves: Buy

Tag : Power Transformer

Crompton Greaves’ widening product basket and inorganicgrowth strategies have helped the company to transition to acomplete power distribution and transmission solutions provider.With this, the company appears qualified to enjoy stock valuationscommanded by the major power equipment players.
At the current market price of Rs 240 , the stock trades at about12 times its expected consolidated earnings for FY-10, which is agood discount to peers.
Investors can consider buying the stock with a two-three yearperspective. With the steep correction and continuing volatilityseen in the stock market, investors can buy in small lots usingdeclines linked to broad markets to best advantage. CromptonGreaves has on an absolute basis returned 80 per cent over the lasttwo years on the back of aggressive inorganic growth measures.
While growth potential remains strong, investors may have to tempertheir return expectations. A strategy of active profit booking onreaching target returns may be a prudent measure. Improving profitability
Crompton Greaves reported a 21 per cent growth in sales and 44 percent growth in net profits on a consolidated basis for FY-2008.There was a slowdown in topline growth due to the company executingfewer orders albeit with higher profit margins. Further, after theacquisition of cash-strapped companies such as Pauwels and Ganz,Crompton Greaves had stated that its near term focus would be toincrease the operational efficiencies and reduce costs across allits businesses, especially in its overseas acquisitions.
The results are reflected in the over-2 percentage points increasein operating profit margins to 10.9 per cent in the last financialyear. Return on capital employed has also increased from 26 percent to 32 per cent for the consolidated entity. Well-crafted turnaround strategy
Crompton crafted a two-phase strategy to improve profitability andgrowth. After making losses in FY-2001, the company exitedunrelated businesses and ramped up presence in its industrial andconsumer products segment apart from the key segment — powersystems. Once the internal operating and financial metrics of thecompany turned around, Crompton Greaves moved to the second phase.
This involved inorganic growth plans through acquisition of globalcash-starved companies which have sound business expertise. Whileit has successfully turned around Pauwels, Ganz is expected to moveout of losses by FY-2009.
As a continuation of the inorganic growth strategy CromptonGreaves, acquired Ireland-based Microsol, which is into substationautomation equipment and solutions.
More recently, it acquired a French company that provides servicessuch as maintenance and repairs for power transformers and oiltreatment and retro filling. With increasing presence in theEuropean markets, a local servicing company may be a good strategyto retain clients.
With these recent additions, Crompton Greaves appears all set tobecome a complete power transmission and distribution solutionsprovider. Strong product profile
Crompton Greaves, along with its subsidiaries, has been addingmuscle to the product profile. Locally, the company’s plantbuilt a 765 KV/260 MVA single-phase generating transformer (thefirst in India) for NTPC, Sipat. For its distribution transformers,it has used Pauwels technology to develop foil wound transformersthat consume less materials but with higher efficiencies. This notonly suggests lowering of costs but, more importantly, effectiveabsorption of technology and bringing about synergy.
The acquired companies too have the latest value-added products,with some of them being market leaders. Pauwels, for instance, isthe leader in SLIM transformers used in wind power installations.These transformers, which link wind turbines to the grid, havebecome a success, especially in the European market, due tofeatures such as lower power loss, compact size and use ofrecyclable materials.
Risks : While Crompton Greaves has so far been successful, especially inits inorganic growth route, challenges remain in successfullyintegrating all the acquisitions.
On the margin front, while the company’s efforts have paidoff in terms of higher profitability, steep hike in raw materialscan spoil the party. While the company is hedged in material suchas copper and aluminium, steel price hikes could pose a risk.