- Buy Maruti with Target-750-759
- Crompton Greaves
Growing well
The company remains well-placed to capitalise on opportunities thrown up by growth in power, industrial and consumer electrical industries
Buy
Crompton Greaves
BSE Code
500093
NSE Code
CROMPGREAV
Bloomberg
CRG@IN
Reuter
CROM.BO
52-week High/Low
Rs 454/ Rs 208
Current Price
Rs 267 (as on 23rd April 2008)
Crompton Greaves a BM Thapar Group Company is mainly engaged in the manufacture, distribution and sale of electrical and electronic equipment/ systems for power, industry and consumer segments.
The company is organized into three business groups viz. Power Systems, Industrial Systems, Consumer Products. Nearly, two-thirds of it's turnover accrues from products lines in which it enjoys a leadership position. Presently, the company is offering wide range of products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps and public switching, transmission and access products. In addition to offering broad range of products, the company undertakes turnkey projects from concept to commissioning. Apart from this, CG exports it's products to more than 60 countries worldwide, which includes the emerging South-East Asian and Latin American markets.
Thus, the company addresses all the segments of the power industry from complex industrial solutions to basic household requirements.
In Power Systems business, Crompton Greaves is one of the largest power T&D equipment manufacturers and the largest transformer manufacturer in India. With the acquisition of Pauwels and Ganz, CGL has achieved a global footprint. The acquisitions have also helped the company to have a presence across the value chain of T&D equipment and services. Today, it is one of the few manufacturers in the country to have access to 765 KV transformer technologies. Hence, it has capability to compete with large companies such as ABB and Areva for a share of incremental investment in T&D sector, which will come largely in high-voltage products. CGL also provides turnkey project execution and retrofitting services.
In the Industrial Systems business, Crompton Greaves is one of the largest manufacturers of industrial motors in the country. Demand for industrial equipment such as motors usually follows industrial capex trends.
In Consumer Products, it manufactures household electrical appliances, such as fans, electric bulbs and pumps. The industry growth is directly linked to GDP growth. With the increase in disposable incomes and a move towards organized housing, the company will gain market share from unorganized and smaller players.
Its business operations consist of 22 manufacturing divisions spread across in Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka, supported by well knitted marketing and service network through 14 branches in various states under overall management of four regional sales offices located in Delhi, Kolkata, Mumbai and Chennai. The company has a large customer base, which includes State Electricity Boards, Government bodies and large companies in private and public sectors.
Impressive December 2007 quarter results
Standalone sales grew by 13% to Rs 915.17 crore for the quarter with revenues from the Power systems growing by 13% to Rs 473.14 crore (or 47% of sales). Sale of Consumer Products division was higher by 15% to Rs 260.26 crore (or 26% of the total sales). And revenues from Industrial Products was higher by 14% to Rs 263.39 crore (or 26% of total sales). Others were down by 35% to Rs 8.91 crore (or 1% of total sales).
PBIT margin of power systems was higher by 250 basis points to 12.4% given the cushion of price variation clause as far as the supplies to SEBs / Utilities. PBIT margin of industrial systems expanded by 400 basis points to 18.3% with the company scaling up value engineering there by improving the realization and cutting down the material cost as proportion to sales value. Equally the PBIT margin of highly competitive Consumer Products division too improved by 110 basis points to 9.8%.
The company that went on acquisition spree have integrated the business globally and reaping the benefits. This together with pick and choose of orders in the power segment in domestic market and value engineering the company managed to improve the margin handsomely overriding the impact rupee appreciation. Operating profit margin increased by 260 basis points to 12.7%. Material cost as proportion to sales net of stocks was lower by 440 bps to 55.7%. Though the staff cost was flat at 5.0% and other cost up by 110 bps to 12.6%, that could not fully offset the gain in material cost thus allowing the OPM to expand by 260 bps.
At operating level, all segments except others have done well on the back of sharp improvement in margin over a decent sales growth. While segment profit of power systems was higher by 42% to Rs 58.85 crore (or 45% of PBIT) that of Industrial systems was up by 46% to Rs 48.23 crore (or 37% of PBIT) riding on higher sales and expanded margin. Similarly the segment profit of consumer durable was up by 29% to Rs 25.47 crore (or 20% of total PBIT). The others segment continues to be in red with its segment loss put at Rs 3.17 crore as against a loss of Rs 1.11 crore in the corresponding previous quarter.
Spurred by forex gain and lease rentals the other income doubled to Rs 14.44 crore. And with interest cost lower by 8% (to Rs 7.15 crore) and depreciation cost higher by just 15% (to Rs 11.50 crore), the PBT before EO was higher by 57% to Rs 111.74 crore. Extraordinary expenses during the quarter as well as corresponding previous quarter were nil.
Taxation including deferred tax and FBT was higher by 70% to Rs 43.84 crore in absolute terms and the tax incidence was higher at 39.2% compared to 36.3% in the corresponding previous period. Limited thus the growth at net-profit level was 49% to Rs 67.90 crore.
Standalone sales for the nine month ended Dec ’07 were higher by 14% to Rs 2716.23 crore. Operating profit was higher by 44% to Rs 327.24 crore with OPM improving to 12% from 9.6%. With gains at sales and operating level being backed by 50% growth in other income and lower interest cost the PBT was higher by 59% to Rs 319.82 crore. After accounting for taxation of Rs 108.97 crore (up 39%) the net profit eventually closed higher by 72% to Rs 210.85 crore.
For the nine month ended December 2007, sales of power systems have increased by 14% to Rs 1356.94 crore (or 45% of total sales) and its segment profit was higher by 53% to Rs 162.93 crore (or 43% of total PBIT). Segment sales of Consumer product were higher by 14% to Rs 814.64 crore and segment profit was higher by 31% to Rs 83.78 crore (22% of total PBIT). Similarly the segment sales of Industrial systems were higher by 19% to Rs 772.44 crore and segment profit was higher by 55% to Rs 139.76 crore.
Consolidated figures are much higher
Against the standalone revenues and PAT of Rs 915.17 crore and Rs 67.90 crore respectively, on consolidated basis, the company has registered revenues of Rs 1713.51 crore and PAT of Rs 82.71 crore respectively for the quarter ended December 2007
The company has four Indian subsidiaries viz CG Motors Private Limited (CGM), CG Capital & Investments Limited (CG Capital), CG-PPI Adhesive Products Limited (CG PPI) and Malanpur Captive Power Limited (MCPL). CGM, CG Capital and MCPL are subsidiaries of the Company, and CG PPI, being a subsidiary of CG Capital, in terms of the provisions of the Companies Act, 1956, is also the company's subsidiary. The Netherlands- based CG International B.V., a 100% subsidiary of the company, is the ultimate holding company of the Pauwels and Ganz Group, comprising 15 downstream subsidiaries. In totality, the company has 20 subsidiaries, 4 Indian and 16 foreign.
Encouraging business environment for all its business divisions
Increase in generation capacities has necessitated increase in transformer capacities. The Government of India (GoI) has set a goal of "Power for All" by FY12E. Investments in infrastructure, particularly in the power generation, and transmission & distribution (T&D) segments, are estimated to be at Rs 1400 billion for T&D alone in the XIth Plan (FY07-FY12). Transformers & switchgears are the key constituents for T&D. Every 1 MW of generation capacity added, entails an additional 7 MVA of transformer capacity to be added. India is set to commission 69,000 MW of generation capacity in the next 5-6 years, entailing an estimated 483,000 MVA of capacity requirement. Going forward, this is expected to create a huge demand for transformers.
This apart, replacement will drive the second round of demand for transformers. Old and outdated transformers are being used by utilities leading to huge T&D losses. Immediate replacement is the need of the hour and the government has been emphasizing on this through programmes like APDRP. Average life of a power transformer is about 25 years and that of a distribution transformer is 15-20 years. This should generate a replacement demand to the tune of 25,000 to 30,000 MVA p.a. in the next 4-5 years
Large industrial capex good for its industrial motors business
The company is also a major player in industrial motors. It manufactures both high tension (HT) and low tension (LT) motors. This segment is expected to grow robustly since there will be large industrial capex in India for the next few years. CGL’s consumer products division, which manufactures products such as household fans and pumps, should also reap benefits of high GDP growth.
Reaping benefits of past acquisitions
Crompton Greaves enjoys superior brand equity in the domestic markets. However, its products were not as widely accepted internationally. The company is now spreading its footprint across the globe with certain key acquisitions that have strong brand equity. Thereby the company has diversified its customer base and reduced its heavy dependence on the domestic market that had proved to be nemesis during FY 1999 to FY 2001.
Crompton Greaves’ acquisitions (Pauwel, Ganz and Microsol), have given it the much-required brand name in the overseas market, access to superior technology and automation products, thus providing unique synergies to become a global T&D player.
In May 2005, Crompton Greaves acquired the Belgium-based loss-making Pauwel group that has five manufacturing facilities in three continents at an EV of Rs 191.4 crore. Since then Pauwel has turned around, partly due to superior European replacement demand and partly due to CGL's better management.
Pauwel group has manufacturing facilities in Belgium, Ireland, Canada, USA and Indonesia and well spread distribution network across the globe. The acquisition catapulted Crompton Greaves amongst top ten transformer manufacturers in the world.
Apart from strengthening it's foothold in the Indian market, Crompton Greaves’ acquisition of the Pauwels Group and it's transformer manufacturing facilities in five countries is expected to provide a significant impetus to the company's international presence.
The additional turnover of approximately Rs 1380 crore of Pauwels Group for it's last financial year is expected to increase Crompton Greaves’ International business to around 50% of it's turnover, making the company a force to reckon with, in the international market.
Apart from improving its geographical reach, the acquisition has given Crompton Greaves a new clientele to whom it can cross-sell its other products, and use its superior project management skills to position itself as a total solutions provider.
Crompton Greaves also successfully acquired Hungarian based Ganz (GTV) on 17th October, 2006. Ganz has added Gas Insulated Switchgears (GIS), Rotating Machines, and the supporting areas of design, erection, and commissioning to CGL's portfolio of products. This step makes high-end technology in switchgears required in EHV systems available to Crompton Greaves. Ganz Translator Villamossagi Zrt (GTV) and Transverticum kft (TV) located in Hungary, have been acquired at an EV of Rs 203 crore. TV is a subsidiary of GTV.
Crompton Greaves expects to ramp capacity utilization at Ganz by executing incremental orders of Pauwels, using Ganz’s facilities.
Crompton Greaves has 18 Foreign Subsidiaries resulting from Pauwels and Ganz Acquisition.
Pauwels and Ganz to benefit from the International replacement demand for transformers
International replacement demand for transformers has also helped in the transformation of Pauwels: The North American grid failure of 2005 caused a virtual blackout in USA & Canada, due to power transformer failure. A majority of transformers had been installed 20 - 40 years ago (transformers usually have a life span of 25 years). This has caused a sudden spurt in replacement demand for transformers apart from increased stress on integration of networks.
This market is expected to grow by 15-17% CAGR over the next three years, as against 3-5% CAGR growth for the last decade. Crompton Greaves, along with its acquisitions (Pauwels and Ganz), caters to the European, North American and Australian markets.
Acquisition Microsol would place CGL to a superior trajectory
Microsol acquisition would increase Crompton Greaves’ strengths in the area of high-end engineering and sub-station automation capabilities. Crompton Greaves will now move towards being a solutions provider from a product based company and market the same all over the world. The acquisition was done at an EV of Rs 57.8 crore.
Will likely acquire more businesses going forward
Crompton Greaves may opt for more acquisitions, especially in the industrial drives and relay automation segment, to expand its geographical reach as well as acquire further high-end technology. The move is well supported by its strong balance sheet and positive cash flows.
Acquisitions to further improve operating margin going forward
In FY 2006, Crompton Greaves’ operating margin was adversely affected because of its acquisition of Pauwel, a loss making entity. However, Crompton Greaves has managed to turnaround the financial health of Pauwel.
With increasing synergies among Crompton Greaves, Pauwel and Ganz expected to fully factor in by FY09E, the operating margin are bound to improve from the current levels. Also, its acquisition of Microsol would enable the company to foray into high-end solution projects, which yield superior margins.
Acquisitions take the company to the elite big league
Crompton Greaves’ acquisitions over the past two years have put the company in the league of large multinational companies such as ABB and Siemens, at least in terms of product portfolio. Apart from high-voltage direct current (HVDC) technology, Crompton Greaves now has access to a full suite of T&D products and services. This will help the company to tap large opportunities in high- and ultra-high voltage segments. Besides addressing the Indian market, CGL is well positioned to access the European and North American markets.
With the acquisition of Pauwels and Ganz, the company has the technology and resources to access these highly competitive markets. An ageing grid and stress on renewable energy has fuelled replacement demand in the European and North American markets. The size of these markets gives ample opportunity to Crompton Greaves to gain significant revenue from them. Pauwels, Ganz, and Microsol will help the company to address these markets.
Buoyant outlook
Strong investment splurge in the power sector along with strategic investment made by the company in technology and capacity to power strong growth momentum for Crompton Greaves going forward. Crompton Greaves continues to expand its product offering and moving up the value chain with both organic and inorganic route. The acquisition of Pauwels and Ganz while filled the product gap for the company apart from providing ready marketing and production footprints for access to European market, the recent acquisition of Microsol have resulted in the company turning fully integrated in the T&D value chain. Having filled the product gap and mustering presence across the value chain the company now turned its focus on improving profitability with right strategies to improve the utilization of resources at hand. On the competitive consumer products market of Fans, Luminaries etc the company is building strong brand recallability and reputation to sustain growth momentum along with right strategies of outsourcing and manufacturing. The new plant for Fans at Himachal Pradesh would bring in better volumes along with tax concessions for the division.
As demand preferences shift from a products to a solutions domain, the company has built capabilities to fulfill customer expectations with integrated solutions that combine information systems, people and processes, in contrast to its earlier emphasis, which was more product oriented.
The integration of the acquired companies has now entered more intricate arenas of information systems, organizational structure and governance. The company has already restructured its transformer, switchgear and engineering projects businesses of Crompton Greaves in India, and the power product and solution portfolios of Pauwels and Ganz into a new SBU-`CG Power', which will be the unified face for its ‘Transmission and Distribution’ business worldwide; this new SBU is expected to further realise benefits of co-ordinated sourcing, marketing and greater value extraction from larger scale synchronized operations in the long run. Though not as large as Power Systems, the company is steadfastly supported in its spirited journey of growth by a stable and profitable Industrial Systems business, and a low cost, high cash flow oriented Consumer Products business. With a unique combination of these three businesses, the company is well poised to capitalize on future global growth opportunities.
Valuation
In FY 2008, we expect the company to register standalone sales and net profit of Rs 3844.82 crore and Rs 302.01 crore respectively. On equity of Rs 73.31 crore and face value of Rs 2 per share, EPS works out to Rs 8.2. Consolidated EPS works out to Rs 10.1. In FY 2009, standalone and consolidated EPS are expected to rise to Rs 10.6 and Rs 12.8 respectively. The share price trades at Rs 267. P/E on FY 2009 consolidated EPS works out to 20.9.
Crompton Greaves: Financials - Bata India
Going places
The company is on an aggressive growth path on the retail front. The company’s massive realestate project is also progressing well
Buy
Bata India
BSE Code
500043
NSE Code
Not listed
Bloomberg
BATA@IN
Reuter
BATA.BO
52-week High/Low
Rs 296/ Rs 136
Current Price
Rs 152 (as on 16th April 2008)
Bata India (51% subsidiary of Bata, Netherland) is the largest footwear retailer and a leader (a 35% market share) in the footwear industry in India. Over the last couple of years, the company has posted massive improvement in financials. In FY 0512 to 0712, while sales have grown at above 10% pa, OPM has more than doubled to 7%.
This improvement in performance is a result of improvement of shoe line designs leading to higher Gross Margins, Opening of many new stores and remodeling of existing stores, Reduction in cash drain stores, Reduction in wholesale credit, Introduction of franchisee model, Reduction in Receivables, Repayment of debts leading to lower financial costs, Rebuilding a strong Management Team, strengthening Team work and efficiency and Introduction of Information technology for better control.
The Wholesale Business has been focused on the top 300 Wholesalers who are willing to do business on the Company's revised commercial terms. The Company has introduced a stringent credit policy in the Wholesale business as a result of which, Wholesale Credit has dropped. Business with Wholesalers who have defaulted in paying the Company in the past has been restricted or stopped. The Wholesale Business is showing overall improvement with the introduction of exclusive/distincti ve shoe lines with higher margins and by reducing the operating costs.
Consolidation of operations in Gurgaon, which is fast emerging as the Retail Capital of India, has also helped in the Company's turnaround.
The country is on the verge of another revolution - the emergence of an 'organized retail segment' also known as Modern Trade which is now already in existence in this country. The elements that will significantly influence this revolution are Supply Chain Management, Manpower Management and Real Estate. Manpower Management and best services will be the most important determinant factor for success. The Company has taken significant measures to rationalize existing manpower that includes designing specific training needs for employees, and extension of VRS. The goal is to bring down employee costs, which is exceedingly high in comparison with competitors.
Another factor that will contribute to the success of organized retail is 'Real Estate'. With traditional shops making way for departmental stores, hypermarkets and western style malls, presence in these happening places will give the much required edge over competitors. Although, the Company has a network of retail outlets spread across the country, it is opening up new outlets in these malls to further strengthen its retail network. With the old stores being renovated and refurbished in line with present needs, the Company is projecting itself as a contemporary and fashion conscious business which will create trends rather than follow it. The new and renovated stores follow international design and standards of Bata Stores worldwide.
Now the company is on an aggressive growth path and has implemented forward looking initiatives like investments in large format stores, trendy shoe collections and customer service programs. These initiatives have resulted in a healthy increase of 13% in turnover in FY 2007. Owing to the changing dynamics of the retail scenario in India and in order to stay ahead of competition, Bata has adopted an ambitious strategy of opening 70 stores every year for the next few years. The company has also introduced exclusive Hush Puppies Stores for the first time in India.With an aim to offer more choice and in-season designs to its consumers, Bata India introduces new collections on a half-yearly basis. The consumers can choose from a plethora of brands that includes trendy international brands like Marie Claire & Weinbrenner, sporty Power & North Star, comfortable Hush Puppies, Dr. Scholls, Comfit & Ambassador.
Bata India’s joint venture real estate project with Calcutta Metropolitan Group Ltd. to develop 262 acres land in Batanagar into a world class integrated township has also been progressing well. The Company is developing around 262 acres of land leased to it in Batanagar. For the purpose of developing this land a special purpose vehicle named Riverbank Holdings Pvt. Ltd. has been formed which is a 50:50 joint venture between the Company and Calcutta Metropolitan Group Limited. The estimated total investment in this Project will be around Rs.1300 crore, excluding the cost of land, school, hospital and hotel construction. The Company's proposal for setting up a Special Economic Zone (SEZ) catering to the IT Sector, which will be spread over a total area of 25 acres, with an approximate investment of Rs.333.5 crore, has been approved by the Central Government, with the full support of the Government of West Bengal. This SEZ will go a long way in making the economy of West Bengal stronger. The company has also been able to finalize with Reliance Group for their setting up a Hypermarket in the Project site. Besides residential, the Project involves the creation of an entertainment and shopping zone, and a golf course along with redevelopment of the river bank as a world- class attraction. The valuation accretion from this project will be substantial for Bata India.
In FY0712, the company's sales have increased 13% to Rs 867.48 crore, OPM rose from 5.5% to 7.1%. With not much increase in fixed costs, PBT before extraordinary items jumped 61%. The company earned EO income of Rs 17.13 crore in FY0612. Due to this growth in net profit in CY2007 moderates to 18% to RS 47.44 crore. For FY0812 we expect the company to report sales and net profit of Rs 971.58 crore and Rs 57.19 crore, giving an EPS of Rs 8.9. Current price of Rs 152 discounts the expected FY0812 EPS by 17 times. Considering the company’s strong brand equity, growth prospects and the potential value creation from the realestate project, the scrip offers sound investment opportunity.
Bata India: Financials
Friday, May 2, 2008
2-May-2008 Trading Tips
