Crompton Greaves: No respite in near term

Even as equity market movement remains sideways, the Crompton Greaves scrip appears to be an exception. The stock is up 13 per cent in the past month and has touched its 52-week high. Although some amount of moderation in price was visible on Tuesday, the recent run-up in prices does not seem be a reflection of its financials, given Crompton Greaves closed its September 2015 quarter on a disappointing note, missing analysts' estimates. Revenues reported at Rs 3,216 crore was down six per cent, while net profit (Rs 52 crore) fell 25 per cent compared to the year-ago quarter. The operating profit margin was, however, maintained at five per cent.

Sentiments around the stock are mixed, after its September 2015 quarter results. Ten out of 24 analysts polled on Bloomberg recommend 'buy' on the stock while seven have 'hold' and the remaining advise 'sell'. Weak order execution, particularly in its international business (largely attributable to certain businesses being negotiated for sale), declining order book (Rs 8,420 crore in the second quarter of FY16) and possible near-term challenges to growth in domestic power and industrial systems business pose as near-term challenges.

That apart, performance of its future businesses (after the spin-off of consumer products segment) was dismal in the September 2015 quarter. Revenues from the power systems segment, which accounts for 58 per cent of the total pie, dropped 11 per cent year-on-year (y-o-y), while growth was flat in the industrial systems segment (Rs 476 crore). Although order inflows for the September 2015 quarter at Rs 2,890 crore was up 15 per cent y-o-y, analysts at JP Morgan note the order backlog levels do not indicate material acceleration in revenue growth for FY17.

Crompton Greaves monetised three assets in October 2015; proceeds of which would help reduce the debt of its international subsidiary. This could bring some relief to the firm's profits, as 54 per cent y-o-y jump in interest cost contributed to lower profits in the second quarter of FY16.

The company is in talks to offload certain international power businesses and the deal is expected to conclude in December 2015. Although this could further de-leverage its books, analysts do not see significant upside to its stock price from the sale. Kotak Institutional Research says: "We do not expect big positive from the sale versus already in-built expectations, but any delay or denial could be substantially negative for the stock."

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