At Crompton, double-digit growth’s afar

The once-darling of investors seems to be losing its charm.

Operating profit growth at Crompton Greaves has wallowed in single-digit rut in the last three quarters, buffetted by macroeconomic illwinds such as the euro zone crisis, a slowdown in the US and low investment in industrial sector globally.

That’s also well below the regular double-digit performances of the past.

Not surprisingly, 23 of the 49 analysts tracking the company have a sell/underweight call on the stock, while 13 are ‘neutral’.

Adding to woes are sector-specific issues such as stiff competition in the domestic transformer segment, declining margins in the power system vertical and inventory build-up in fans.

Crompton’s strategy to step up inorganic growth also seems to have backfired with its overseas operations posting a loss of Rs96 crore in the first nine months of current fiscal. About Rs51 crore of this came in the third quarter.

The company is looking to stem the slide by planning realignment of its global manufacturing bases and integration of key businesses.

According to a recent report by Kotak Institutional Equities, Crompton planned to reduce the manufacturing in Belgium plant, a high cost centre, and shift focus to its Hungary production lines, which will cater to a greater share of European demand. The company has also planned to source components for its new Brazilian unit from its unit in India to cut transformer manufacturing costs.

But analysts are not enthused.

“The company is clocking a meagre single-digit Ebitda growth and I don’t see any trend reversal or double-digit growth any time soon,” said Ravindranath Nayak, senior analyst, SBI Cap.

During the peak global recessionary period of 2008 till fiscal 2011, the Ebitda margins of all its peers took a hit but Crompton showed a good margin growth of 13-14%.

“So how come Crompton is showing a reverse trend of declining margin when the situation is improving,” he asked.

SM Trehan, former managing director, in April 2011, had given a guidance of 15% growth in domestic business and said that Crompton was open for more acquisitions if the potential target offered synergy with the company. But in last nine months, the revenues grew 9% and two acquisitions in May 2011 have not added much to the bottomline.

John Perinchery, senior analyst of Asian Markets Securities, questioned the aggressive acquisitions by the company in the past few years. In a span of six years, the company had acquired nine companies — Pauwels (2005), Ganz (2006), Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), Power Technology Solutions (2010); three businesses of Nelco in 2010, Sweden-based Emotron Group (2011) and US-based QEI Inc (2011).

“The company’s profit started taking hit in first quarter of 2011, which was also the period when Crompton acquired two companies,” he said, adding many overseas companies which Crompton acquired had projects that were either at a very low margin or were executed at loss.

Viral Shah of PUG Securities, who has a ‘sell’ tag on the company, too, sounded cautious. Crompton has 40.5% of the company’s revenue from the US and Eurozone, which are witnessing a slowdown. Moreover, its power system business which contributes 65% of the revenues is expected to have low single-digit margin in fiscal 2012 as against double-digit margins registered in fiscal 2011, he said.

Monami Manna, senior analyst, Sunidhi Consultancy Services, who has a ‘hold’ call on Crompton, said days of double-digit Ebitda growth are over.

“When things were tough in 2010 and 2011, the company had shown strength and clocked a double-digit Ebitda growth of 14% and 13.4%, respectively, but suddenly in the first two quarters of the current fiscal company recorded a 7.5% and 8.4% Ebitda growth,” she said.

But she feels comfortable with the scrip as the management is taking some corrective measures. “Negatives are better than uncertainties. It is good that management has now come into a corrective mode which may throw some positive surprises,” she said.

Another analyst from a domestic brokerage said it was not easy to realign manufacturing bases. “These things don’t happen in one quarter. It will take at least two years to straighten up things,” he said on the condition of anonymity. Moreover, he said the company took a long time to initiate these moves.

“What they were doing when the market capitalisation of the company was plummeting? Today it has come down to Rs10,000 crore from a high of Rs18,000 crore,” he said.