Moneycontrol Bureau
Electrical energy solutions provider Crompton Greaves shares climbed more than 4 percent intraday Wednesday as analysts expect earnings to surprise in next financial year i.e. FY18.
While maintaining outperform rating on the stock, Macquarie raised FY18 earnings per share forecast and target price by 6 percent (to Rs 92 from Rs 87) on the back of higher margin forecast.
"Crompton Greaves' Q1FY17 numbers were in line with expectations, with the domestic industrial business continuing to be the bright spot. Management has reiterated its guidance for the sale of the overseas power business by October 2016 and international automation business ZIV by end-FY17," the brokerage house says.
The sale of overseas power business can take out significant overlapping costs such as overhead, depreciation, etc and ZIV sale would make the company entirely debt-free, Macquarie believes.
Given the ongoing corporate action (sale of overseas business), Morgan Stanley believes costs could remain elevated in the near term, which lends margin uncertainty.
Crompton highlighted that revenue progression during the quarter has been on expected lines, though margins in the near term could be affected by low margin orders in domestic power systems business; higher costs related to sale of international business including support services provided to the businesses; and likely costs in the businesses that are in the process of being closed down.
While order flow grew a robust 46 percent YoY in industrial segment (helped by order from Indian Railways and industry leading growth), it was a muted around 4 percent in the domestic power system business.
Crompton in Q1FY17 reported a 35 percent growth YoY in standalone revenue, driven by 59 percent growth in power systems on low base as there was labour issues in Q1FY16. Profit declined 48 percent.
Consolidated profit from its continued operations stood at Rs 40 crore for the quarter against loss of Rs 63.7 crore in year-ago period. "The loss from discontinued operations stood at Rs 49.57 crore in Q1 against profit of Rs 1.47 crore in corresponding period of last fiscal and loss of Rs 223.8 crore in preceding period," the company said.
Operating profit margin on standalone basis came in at 5.9 percent against negative 1.6 percent in Q1FY16. Recovery was driven by power systems, with a PBIT margin of 5.6 percent (against negative 6.3 percent YoY), and improvement in industrial systems, with a PBIT margin of 10.9 percent (against 9 percent last year).
With retaining buy rating and target price of Rs 86, Citi says it sees early signs of business turnaround based on renewed management focus on business; expected rebound in standalone power EBIT margins from historic lows of 5.1 percent in FY16; 4 successive quarters of YoY sales growth in industrial business; and likely balance sheet deleveraging from proceeds of sale of international T&D business.
Crompton has been in a state of flux for the last 2 years with the consumer business demerger and sale of loss making international businesses taking an inordinate amount of management time and energy. Change in MD/CEO and an India macroeconomic slowdown further added to the issues.
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