Ten analysts from various brokerages are on a visit to the facilities of Crompton Greaves in Belgium and Hungary since Monday. They will return next Monday, said sources familiar with the development.
During the five working days, the beleaguered power systems maker expects to convince them of the sunny side rising. Crompton Greaves is recasting operations in several segments to stem both a slide in growth (last fiscal’s net profit of Rs373 crore was significantly lower than Rs888 crore the previous fiscal) and mounting debt (Rs884 crore, up from Rs395 crore).
Overseas arms posted a Rs137 crore loss last fiscal (against a profit of Rs225 crore the previous fiscal), while domestic business declined as order inflows in the key transformer segment dwindled.
In the first half of this fiscal, Crompton’s Belgium operations alone posted a Rs130 crore loss. Despite an 11% rise in revenue, first half net profit shrank 34% on-year and operating profit 26% on-year.
Crompton is cutting costs and restructuring its power business, while in the consumer business, it is scaling up production and strengthening distribution channels, with the help of the Boston Consulting Group for rejuvenation, expanding capacity (at Vadodara for lighting products) and sourcing equipment from China. It has also moved operations relating to 31 projects from high-cost Belgium to Hungary where labour is 15-20% cheaper. It has curtailed transformer manufacturing capacity to 5,000 megavolt-ampere (MVA) from the current 12,500 MVA in Belgium, a move Satyam Agarwal and Deepak Narnolia, analysts at Motilal Oswal, said in their November 16 report, is aimed at right-sizing capacity and
rationalising business functions.
The Motilal Oswal report said Crompton’s Hungary operations are expected to be profitable in the third or fourth quarter of this fiscal, better than a net loss of Rs63 crore last fiscal, thanks to higher capacity utilisation (versus 40% last fiscal).
During the Beligum-to-Hungary transition, delivery delays and liquidated damages are possible, potentially having an impact on revenue recognition and the systems business, the report added.
Rabindra Nath Nayak, co-head of equity research at SBI Cap Securities, said the capital goods sector is growing slowly globally. But many of Crompton’s subsidiaries, based in Europe, are showing negative growth due to contracting European economy. So, Crompton’s recent measures would not produce much results until the macroeconomic situation improves, he said. Nor would they help improve valuations, Nayak said.
John Perinchery, senior analyst at Asian Market Securities, agreed Hungary operations would not produce results in the next 6-8 quarters. “Hungary is an agrarian economy where labour is cheap but when it comes to skilled labour, it is just 10-15% cheaper than Belgium.”
Crompton needs to rethink its acquisitions as the previous ones are not yielding the desired results. For instance, Pauwell, the Belgium-based subsidiary, reported a loss of Rs50 crore in the first quarter of this fiscal, analysts said.