The Hindu Business Line : Crompton Greaves: Buy

A couple of acquisitions have catapulted Crompton Greaves into the global league. The company also has access to an expanded product range, with expertise in power services and the ability to provide total solutions.

Strengthening its portfolio in the high-range T&D segment.

Crompton Greaves (Crompton) has undergone a spectacular transformation over the past five years from a loss-making debt-laden company operating in multiple non-core businesses to a focussed global player in the power systems arena. After the acquisition and successful integration of Pauwels, Crompton recently acquired two Hungarian companies and is now getting ready to take on the MNC giants in the power play. A look at what these acquisitions mean for the company's growth.

Considering Crompton's improving return ratios and capital efficiency, low debt, and the capability to integrate global operations, the stock has the potential to appreciate from the current levels. It trades at 18 times its consolidated projected 2006-07 per share earnings.

Pauwels adds value

Crompton acquired Pauwels, a Belgian company with five manufacturing plants spread across three continents. With this acquisition, Crompton has gained ground in the major American and British markets . In just a year, Pauwels has started contributing significantly to Crompton's growth.

The acquisition has given Crompton capacity, a ready clientele, presence in the high-range transformers up to 500 kV (Crompton's range was only up to 400 kV), specialised skills in turnkey execution of substation projects up to 500 kV, superior technology and strong market presence in the windmill sector. Pauwels' products also enjoy higher margins due to superior technology.

The benefits are clear in the numbers. Pauwels has grown at a scorching pace, contributing 36.8 per cent of Crompton's consolidated turnover for 2005-06. Pauwels order-book has grown 64 per cent for the year. Its return-on-capital employed has risen from 4.1 per cent in 2004 to 20.3 per cent. The power systems division now contributes 64 per cent of Crompton's consolidated revenues. On a standalone basis, the division accounts for 44 per cent of the revenues.

Hung(a)ry for growth

Last week, Crompton announced the acquisition of two Hungary-based companies — Ganz Transelektro Villamossagi Zrt (Ganz) and Transverticum Kft (TVK). These acquisitions will take Crompton a step further in the portfolio strengthening strategy. The new additions to Crompton's portfolio are high-range transmission and distribution equipment up to 800 kV; gas-insulated switchgears; rotating and traction machines up to 8 MW (used in railway applications); and turnkey product execution capability in the T&D segment.

High voltage, high growth

Crompton, which had the capacity to manufacture up to 500 kV high-voltage transformers (after the acquisition of Pauwels), will post-Ganz acquisition be able to step it up to 750 kV.

Few international players such as ABB have the capacity to cater to this segment. Areva plans to set up a manufacturing plant for this segment. With this acquisition, Crompton too would vie for this pie, which will be the fastest growing segment within the T&D segment.

With a number of large power projects expected to come up in the next few years, grid voltage is expected to go up from 400 kV to 760 kV. The estimated market size for such high-voltage equipment is expected to be around Rs 2,500 crore in the next three-four years.

Ganz will also add gas insulated switchgears up to 300 kV to Crompton's portfolio that find applications in high- and medium-voltage electricity distribution systems. These switchgear products are more sophisticated, offer better safety and are compact compared to the conventional ones. They are ideal for residential areas and cities and command better margins.

Gaining strength in solutions

While Pauwels has provided Crompton an opening into the solutions business, the acquisition of TVK will further strengthen its presence in this segment. TVK has the capability to provide turnkey services for setting up substations up to 400 kV with conventional switchgears and GIS up to 300 kV. The acquisition will take it one step further and help it balance its business model between products and projects.

The deal

Crompton will pay 35 million (approximately Rs 200 crore) for the deal and expect the acquisition to pay off in less than two years. Ganz is a loss-making company with a turnover of Rs 200 crore.

Its operations ran into rough weather due to working capital shortage and under-utilised capacities. Crompton plans to leverage this to make up for the shortage at Pauwels manufacturing facilities. The Hungarian facility will be used to service Crompton's European customers.

Considering the success in turning Pauwels' operations around, there is reason to believe that the recent buyout too may pay off in the medium term. Further, with its high-end product portfolio, the overall margins may also improve once the integration is over.

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