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Crompton stock hinges on overseas business turnaround

LiveMint logoLiveMint 11-06-2014 Vatsala Kamat

Crompton Greaves Ltd kept investors happy by posting a 158% jump in net profit in the March quarter. But its share price has risen by 28% since April and now trades at a rich valuation of 17 times estimated earnings per share for 2015-16. Is the rally sustainable? It will depend on when its international subsidiaries, which contribute almost half of revenues, will turn around their operations.

Net revenues of overseas units rose by 30% year-on-year in rupee terms. That helped offset the flat revenue growth posted by the stand-alone entity, resulting in consolidated revenue growth of 11.2% from the year-ago period.

But the international subsidiaries continue to incur losses, with the March quarter loss figure at `45 crore. The loss was mainly on account of losses in Canada and Saudi Arabia (an associate venture), albeit at a lower level than in earlier quarters. Besides, profitability in Europe did not improve in keeping with analysts’ forecast, and will take a few more quarters to improve, according to the management. A report by Prabhudas Lilladher Pvt. Ltd said that expanded capacity at Hungary is yet to stabilize and the order backlog and projects from Belgium are still to be executed.

In fact, the profitability of the domestic power systems and the industrial systems business is higher compared with the international division.

Crompton’s stand-alone entity’s performance, which was in line with the Street forecast, saw operating profit margin rise by 2.2 percentage points over the year-ago period. The consumer products segment is the bread and butter segment for the firm. In spite of sluggish demand, profit margin expanded, unlike the industrial systems division’s decline in profitability.

In fact, the consumer products segment drove the 17% growth in net profit of stand-alone operations, which in turn helped offset subsidiary losses and took Crompton’s consolidated operations into the profit zone.

Despite these challenges, investors have reason to be optimistic about its long-term performance. Along with rising domestic demand, improved economic environment in the US and Europe, and a lower operating cost structure should boost the company’s consolidated profit margin over the next two years.

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