Crompton Greaves

Investors with a two-year perspective can consider adding the stock of Crompton Greaves to their portfolio. Strong positioning in the domestic transformer market, steady profit margins despite competitive pressures and continuing inorganic growth augur well for the company's earnings growth. At the current market price of Rs 274 the stock trades at 12 times its expected per share earnings for FY-12.

Crompton has, for a couple of years now, been a local market leader in the 765 kV transformer segment, traditionally dominated by four-five domestic players. However, active participation by Korean and Chinese players for orders placed by Power Grid Corporation (PGCIL) has not only dented market share but has resulted in severe pricing pressure. Despite this, Crompton has managed to bag about one-third of the orders from PGCIL in FY-10; expanding its share compared with a year ago.

Interestingly, Crompton has achieved this without compromising on profit margins. While most other peers have faced margin pressure, despite lower raw material cost, Crompton's operating profit margins increased by four percentage points to 14.2 per cent over a year ago numbers. Cost efficiencies in its overseas operations and lucrative margins from West Asian and African orders could have buttressed overall margins, even if domestic margins did stagnate.

The Chinese and Korean players benefitted from their respective currency depreciation against the rupee, apart from cost advantages. If this advantage wanes, the pricing pressure may be less intense.

After five acquisitions in the last five years, Crompton continued with its inorganic growth strategy with the recent acquisition of a UK-based electric engineering company. This move will help integrate Crompton's overseas operations.

Crompton's order backlog of Rs 6,080 crore is marginally lower than a year ago position mainly on account of a mild dip in overseas subsidiaries' order flows in FY-10. However, healthy order intake growth of 21 per cent in the December quarter suggests that the momentum has picked up. Even while it could take a couple of quarters before the overseas markets revives, PGCIL's planned spending of Rs 28,000 crore in the next two years is likely to provide ample opportunity. Crompton Greaves' growth in its industrial systems (19 per cent) and consumer products (27 per cent) is also likely to drive earnings. Planned listing of Avantha Power, in which Crompton holds 32 per cent, could also provide some unlocking of value (investment valued at Rs 6-8 a share, assuming a price to book value of 2). Increasing competition from overseas players could erode market share and margins for Crompton and remain key risks.