A 58 per cent drop in consolidated net profits of Crompton Greaves for the June quarter over a year ago did not go down well with the markets. The share price plunged 26 per cent in two trading sessions.

While pricing pressure in domestic power products is an issue that the company has been facing for quite sometime now, sharp hike in raw material costs, an unexpected dip in revenues of European subsidiaries and a slowdown in consumer products were other pressures that Crompton Greaves had to handle concurrently.

The tepid 6 per cent growth in consolidated sales was made possible partly on account of the rupee gaining against the euro. But for this, the European operations, which accounted for close to 50 per cent of sales in FY-11, saw a drop in sales for the first quarter of FY-12.

Crompton Greaves and its subsidiaries together reported a sharp 38 per cent decline in earnings before interest, tax, depreciation and amortisation (EBITDA) and 5 percentage point fall in EBITDA margins to 7.5 per cent. This was triggered by a whopping 12 percentage point jump in raw material costs.

Copper hedging

Hedging of copper prices, which reached a new peak in February, did not help, as other raw materials such as oil or steel were left to the vagaries of the market. Realisations declined around 10-12 per cent over a year ago.

Competition from Chinese and Korean players in the domestic transformer market has kept local players on their toes, forcing them to be cautious on product pricing.

Dip in overseas operations

The unexpected twist in the June quarter numbers came from overseas subsidiaries. According to the management, the European units could not deliver products manufactured for clients in countries such as Libya, Algeria and Morocco as a result of political turmoil in those regions. The company therefore lost revenues that were due on orders placed.

This is said to be true of clients in West Asia as well. The massive increase in inventories in June quarter compared with March-end, especially on a consolidated basis, is clearly suggestive of non-delivery of products. That some of the units in Europe are working on a three-days-a-week schedule, instead of the customary five days (from July 1) suggests that the management does not expect a pick-up in orders or execution in the near term.

Slowing consumer biz

What also came as a surprise was the sedate 12 per cent sales growth in the consumer products division, which expanded upwards of 25 per cent in FY-11. Segment profits in fact declined, with high capital employed suggesting higher inventory as well. While it may be too early to call this a trend, a slowdown in this segment, which accounts for a fifth of sales, could be detrimental.

Not all is bad on the order front for Crompton Greaves. The Rs 7,088-crore order book is about 1.1 times sales, good enough considering that only about 40 per cent of the business is determined by order book. Even the international market witnessed a 16.5 per cent increase in order book over a year ago.

The question though remains on whether these would be delivered. On the domestic front, a pick-up in orders from PGCIL (pick-up being visible) would ensure improved volumes, providing some support to profits.

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