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Sunday, Sep 26, 2004

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Crompton Greaves: Buy

Sowmya Sundar

EXPOSURE can be considered in the Crompton Greaves stock at Rs 222. The stock trades at 13 times its trailing 12 months per share earnings of Rs 16.5.

The improving business prospects for the power systems, industrial systems and consumer products divisions and a substantial reduction in interest costs are the key earnings growth drivers.

Crompton Greaves operates in three core business — power systems (turnkey projects, substation projects, power and distribution transformers, circuit breakers and switchgears), industrial systems (alternators and motors), consumer products (lighting, fans and pumps).

Industrial systems and consumers products are the fastest growing and most profitable businesses for Crompton Greaves. ]

The ongoing construction boom in the residential and commercial buildings has enhanced demand for its lighting systems and fans. The order intake during the year rose 17 per cent.

The contribution of this segment to revenues increased from 31 per cent to 33 per cent. In the power systems segment, the largest revenue contributor, Crompton Greaves, enjoys a dominant position in transformers, high-tension switchgears and vacuum interrupters.

The company's strategy to concentrate on private clients rather than just State electricity boards improved cash flows and profitability. The working capital requirement was 13 per cent lower at Rs 246 crore despite the revenue growth.

The Accelerated Power Development and Reform Programme, under which funds are allotted for revamping the distribution network, has improved prospects for its medium-term switchgear business.

Improved thrust on the services and spare parts business, diversification into lower voltage distribution projects and allied businesses such as power plant lighting and cabling have not only enhanced the scope for revenue growth but also margins.

At the operational level, margins remained stable at 6.2 per cent despite the higher input costs.

The total unexecuted order book has shown a 22 per cent rise at Rs 842 crore, indicating strong revenue growth in the medium term.

Crompton Greaves reduced borrowings by 27 per cent in 2003-04 to Rs 334 crore. The substantial reduction in interest costs would directly prop up earnings.

For the June 2004 quarter, interest costs almost halved. Savings in interest costs alone contributed close to 40 per cent of the earnings for the quarter.

A 30 per cent reduction in interest costs itself could prop net earnings for 2004-05 by 16 per cent.

Given the substantial scope for interest cost reduction, positive business prospects and a good order book, the stock has scope for appreciation over the medium term.

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