Crompton Greaves - Avoid Investing for now

Weaker demand in the global market could mean a slower pace of growth for the firm.

With economic activity slowing down in Europe and the US, engineering firm Crompton Greaves could be in a bit of a spot. The firm’s international business which, in 2007--08 contributed around 43 per cent to the revenues, and has grown by a brisk 50 per cent in the six months to September 2008, might just lose some pace. The management says the power division hasn’t seen any cancellations in orders so far. At the end of September 2008, the order book was worth about Rs 6,780 crore, which is reasonably healthy.

But the Rs 6,832 crore Crompton’s subsidiaries Pauwels and Ganz, which sell mainly in the Europe and US might find the going tougher than they imagined some time back, says a BNP Paribas report. Crompton specialises in transmission and distribution (T&D) equipment and with utilities likely to scale back capital expenditure, future orders may come in at a slower pace.

Already the French T&D major Schneider, has trimmed its sales growth target for 2008 by 250 basis points to 5.5 per cent, citing weakening demand as the main reason. Pauwels has a fairly high exposure to the distribution transformer market, which is directly linked to new construction.

The Crompton management recently indicated to a financial website that the domestic business could slow down in the current year; consolidated revenues have grown at a brisk 33 per cent in the first half of 2008-09. Both the domestic consumer and industrial businesses —which together contribute around 28 per cent to the firm’s revenues — appear to be losing momentum.
The industrial segment is hurt because companies are postponing capital expenditure; in a tight money market they’re not able to mobilise the resources. The problems in the consumer sector can be traced back to the slump in the consumer real estate sector. Net profits for Crompton have risen a smart 34 per cent in the six months to September 2008; in 2007-08 they had increased 45 per cent to Rs 407 crore. On a higher base, that performance could be hard to match this year.

Looking at the report, it is better to avoid investing in this stock for time being.