According to reports, keen watchers of the Bombay Stock Exchange would have observed Crompton Greaves share move up purposefully in the three months ending March. At a 24 per cent climb, Crompton Greaves’ outdid its peers in the power and distribution business – Alstom India, Siemens and ABB – on the BSE’s capital goods index.
Some attribute the rise in the stock price to a media report some time back that Gautam Thapar, the company’s promoter-chairman who owns a 42.51 per cent stake, was looking for buyers for his flagship company. Though Crompton Greaves has vehemently denied it, the rumours have refused to die down. On Tuesday, another report said that the stake may be picked up by Japanese equipment maker Hitachi, inviting another denial by the company. “We are not in negotiations with anybody for stake sale,” Crompton Greaves said on Wednesday. Hitcahi also termed the report as false.
The more probable reason for the ascent of the share price probably lies in the fact that capital goods equities, till now underperforming, have begun to gain weightage. A surge in foreign institutional investment in Indian equities and optimism that the sector is slowly coming out of the woods have led to the sharp rally, with Crompton Greaves a prominent beneficiary.
Such is the optimism in the company about its prospects that the Crompton Greaves management is confident a turnaround awaits its languishing international business, with perhaps break-even at operating level in the first quarter of 2014-15 itself. Its business is divided into three main segments – the power business contributes 60 per cent to revenues (Rs 12,094.44 crore in 2012-13, Rs 9,714 crore in three quarters till December 2013), followed by consumer products with 20 per cent and industrial systems, 15 per cent.
Crompton Greaves’ overseas business is both its strength as well as its weakness. Operations in the United States, Canada, Europe and Indonesia contribute over 45 per cent to its consolidated revenue. But lower-than-expected order growth, high commodity prices and restructuring costs have caused a consolidated loss of Rs 36 crore in 2012-13, the first loss reported in a decade. In 2013-14, the overseas segment lost money in all the three quarters for which figures are available, with the North American operations running up a loss of $10 million. At home, however, the company figures were in the black.
Last year, the company restructured its European operations, shutting its transformer plant in Belgium and shifting the manufacturing to Hungary, which has a lower cost base. The company entered a one-time Rs 120 crore restructuring expense on its books. “Savings from the restructuring of Belgium operations are in line with expectations,” adds Demortier. “We have increased product offerings and sourcing from low-cost countries. The capacity of the Hungarian plant has been increased according to plan and is fully operational since January 2014.”
One area that Crompton Greaves has focused on and from which it hopes to do well is the automation business. This comprises an intelligent infrastructure that adapts automatically to electricity consumption patterns and includes smart meters, protection devices as well as charging stations for electric cars. In 2012, it acquired Spanish company ZIV which specialises in smart-grid and automation solutions.
Says Demortier: “Our automation business has a pipeline of projects across the globe. We’ve been selected as one of the potential suppliers for a smart-grid project in France. Overall, the project is worth euro 4.1 billion, but Crompton Greaves is bidding for only a part of it, related to the smart-metering portion. That is worth euro 1.1 billion, and the project award is scheduled for July.”
The company set up a smart-grid manufacturing facility at Bangalore in January and has secured domestic orders worth Rs 70 crore. It has made a joint bid with Infosys for the advanced metering infrastructure project in Gujarat valued at around Rs 200 crore.
However, analysts say it will take time for the automation business to grow in India. “These products are more suitable for advanced markets such as the US and Europe and their widespread use in India is still some years away,” says Debashish Mishra, senior director (consulting), Deloitte Touche Tohmatsu. He explains that with increasing use of renewable energy, smart grids will be in a better position to manage transmission and distribution systems.
“In a conventional system, the reverse flow of electricity from rooftop solar-power installations can create safety hazards. But these will be handled efficiently by a smart grid. This has real usage in India. The smart grid also allows suppliers and the consumers to be more flexible and sophisticated in their operational strategies. Only the critical loads will need to pay the peak energy prices, and consumers will be able to be more strategic when they use energy,” says Mishra.
Besides the slow adoption of modern technology in the power sector, the other concern for Crompton Greaves is competition and margin pressure in the consumer products and industrial segments. According to the company, its customers have checked their capital expenditures, which has impacted growth of orders. This has resulted in reduced utilisation in factories and, thus, profitability. The company says it is trying to beat the slowdown in the industrial segment by focusing on exports (it recorded a 20 per cent growth in first three quarters of 2013-14 over the same period in the preceding year), supply chain improvements and development of value-added electronic solutions. It is also intent on tapping business from the Indian Railways.
“We see a better outlook in both domestic and international market in 2015,” says Demortier. “We feel confident of our performance on the back of strong product portfolio. The company’s efforts to integrate businesses and usher cost efficiency during the last two years have started to show results, which should drive earnings growth.”
As the growth prospects for the company improve, analysts say the talk of stake sale appears to be premature. J P Morgan research analysts Sumit Kishore and Deepika Mundra said in a report last month that the purported bid of the Avantha Group, which is Crompton Greaves’ parent entity, to sell the company appeared premature since the management was expecting a turnaround in 2014-15.