 "Why Crompton Greaves is not a keeper")
It is difficult to find a consensus when it comes to the first quarter results of Crompton Greaves. Rupesh Kumar of broking firm KR Choksey expects an eight to ten bps (100 bps=1percent) decline in net profit to Rs 210 crore and a similar decline in operating profits to Rs 330 crore, both on a year- on-year basis (y-o-y). Angel Broking estimates an even sharper decline with the company’s net profit, down 4.3 percent at Rs 183 crore Y-o-Y . The revenue is estimated by Angel to be at Rs 2,486 crore, while Kumar estimates it at Rs 2,564 crore, up 11 percent on a year-on-year basis.
[caption id=“attachment_43481” align=“alignleft” width=“380” caption=“The biggest factor that could trigger a slowdown would be the domestic power section, with power contributing 43 percent of its standalone revenue and 68 percent of its consolidated revenue. Screen grab from company website.”]
[/caption]
UBS is more hopeful with an estimate of Rs 210 crore as net profit, a rise of 14 percent. UBS attributes these numbers to a generally robust first quarter for the company and also improved outlook in France and Germany. Kunal Sheth of Prabhudas Lilladher has roped in an 11 percent topline growth and a 6 percent growth in net profits, with margins remaining flat at 13 percent.
One of the factors to look at would be the company’s two major overseas acquisitions this quarter, that is, Sweden-based Emotron Group and US-based QEI, Inc. KR Choksey’s Kumar expects a healthy growth of 21 percent in its international business though the benefits from the acquisitions will not play out immediately in this quarter. Hemang Thaker of Angel Broking feels the company will become a stronger player in the industrial and power systems business and will help the company offset the sluggishness in the local transmission and distribution markets.
The biggest factor that could trigger a slowdown would be the domestic power section, with power contributing 43 percent of its standalone revenue and 68 percent of its consolidated revenue. The power segment can only look up with smoothening of operational hurdles in the generation side, like issues relating to not having enough coal or procuring required land. In all, the year saw 692 projects worth Rs 1,70, 200 crore put on the back burner by project promoters. During financial year 2010, 477 projects worth Rs 1,51,2oo crore were abandoned by the promoters.
However, for UBS intensifying competition in domestic power business would be major worry in the transmission and distribution space. Also because of sharp decline in industrial margins in the last quarter, a positive surprise in the net profits would be impossible.
The stock has corrected from its high levels of Rs 272 and closed at Rs 242 today. It is trading at 15.8 times its estimated 2011-12 earnings. This is much lower than the five-year average of 18.3 times. But as Kumar pointed out, “Though valuations may look attractive, if there are question marks over the business, valuations do not matter.” No doubt, UBS maintains a Sell call on the stock. It might be worthwhile to see if Crompton has any rabbit to pull out of its hat tomorrow!