Understanding the situation of Crompton Greaves prevalent in 2000 -01:
Crompton Greaves reported heavy loss in two consecutive years i.e. in 2000-01. The cumulative loss for the fiscal year 2000-01 was 220 crs. It was a perfect nail in the coffin for the company which floundered wealth for more than a decade on extravagant investments in joint ventures and associate companies. The stock price was languishing at an all time low at Rs. 20 for more than two years. The operating margins were hovering around at an all time low at 4.5%. Certain divisions of the companies were struggling to make money and were eating up the profits of the company made by other division rendering the company as whole unprofitable and difficult to maintain e.g. the digital division of the company accounted for 2.7% of the profits but was using about 6% of the total capital employed. Moreover Crompton Greaves had reported losses for two consecutive years.
Major investments were done in non-core businesses which were eventually making losses. It also consumed considerable energy and time of the management e.g. the digital division had good growth prospects, but because it having limited size of operations and the fact that it did not fit with core power equipment business hampered its competitiveness in a market with bigger and established players. Consequently management was not able to focus fully on the core businesses, which though being profitable and major revenue earner were not able to realize their full potential.
The earnings per share was negative because of negative PAT and the company was facing high levels of debt to equity (2.33 in 2000 2.36 in 2001). This also resulted in high interest payment which had a negative effect on the bottom line of the company (nearly 6.9% of the total sales was used for the payment of interest on debt). Moreover more than half of the bank loan was in the form of demand loans which represented 22% of the total debt. (Demand loans are generally taken from banks to pay an immediate expense and are generally short term in nature. They also have a higher rate of interest on them). This had a direct impact on the liquidity and viability of the company.
The exports were languishing and the company was being primarily seen as a domestic company. The company was also steadily losing market share in the domestic market. There were 9395 permanent employees in 2000-01 compared to present number of 8564 at the end of last fiscal year. It indicates the low level of operational efficiency prevalent during the turn of the decade and the loss making operations. Along with it the manufacturing costs were very high with plants being located at economically unviable areas (Mumbai having high cost and low productivity) and cost of sourcing raw materials was very high.
About the Company
In the year 1878, R.E.B Crompton & Company was founded by Col R.E.B. Crompton. 50 years later in 1927 the company merged with F.A. Parkinson Ltd., to form Crompton Parkinson Ltd., (CPL). Greaves Cotton and Co. (GCC) was nominated as their Indian representative. In 28th April, 1937, CPL established its wholly owned Indian subsidiary Crompton Parkinson Works Ltd., in Bombay, along with a sales organization, Greaves Cotton and Crompton Parkinson Ltd, in collaboration with GCC. Crompton Greaves is currently dedicated to provide complete power solution and is engaged in designing, manufacturing and marketing high technology electrical products and services related to generation, transmission and distribution of power and execution of turnkey projects.
Currently Mr. Gautam Thapar is the Chairman and Mr. Sudhir M. Trehan is the Managing Director of the company.
The company is organized into three business groups:
- Power Systems: It includes the power business of Crompton (India) and the global transmission and distribution business and is the largest revenue generator for CG. It manufacutures power transformers, distribution transformers, extra high voltage(EHV) and medium voltage (MV) circuit breakers, gas insulated switchgear (GIS), EHV and MVinstrument transformers, lightning arrestors, isolators, vacuum interrupters and electronicenergy meters. In addition to these it also provides end-to-end turnkey solutions for transmission and distribution through customized projects. It grew by a CAGR of 62.3% during the FY2005-09 segment in revenues and 75.1% in EBIT over the mentioned period. Moreover several overseas acquisitions were made in this segment which also contributed significantly to the growth. It is estimated that this segment will register a growth of 14.1% EBIT and 15.9% CAGR respectively during the FY 2009-11E
- Consumer Goods: This segment is engaged in the manufacturing business of fans, pumps, lighting equipment and a range of electrical household appliances such as geysers, mixers, grinders, toasters and emergency lanterns. The Fans Division is the market leader in India with one of the widest distribution network. It grew by a CAGR of 18% during the FY2005-09 segment in revenues and 24.9% in EBIT over the mentioned period. It is estimated that this segment will register a growth of 13.7% EBIT and 12.1% CAGR respectively during the FY 2009-11E.
- Industrial Systems: It is involved in the manufacture and marketing of Electric Motors and covers - Fractional Horse Power Motors, LT Motors, HT Motors, DC Machines, Stampings, Electrical Control Panels for diesel electric locomotives and Railway Signalling Products. It enjoys the highest EBIT Margin amongst the various business segments. It grew by a CAGR of 19.1% during the FY2005-09 segment in revenues and 29.1 % in EBIT over the mentioned period. It is estimated that this segment will register a growth of 10.0 % EBIT and 5.3 % CAGR respectively during the FY 2009-11E
The Company has also undertaken manufacturing and marketing of industrial electronics, consumer electronics, household appliances and railway signalling equipment from which it has pulled out.
The registered office of Crompton Greaves is at Mumbai.
The company has 21 manufacturing plants, spread across Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka and is well supported by a well-knit marketing and services network through 14 branches with four regional sales offices taking care of the overall management.
It also exports its products to countries, which includes the Southeast Asian and Latin American markets.
It has joint ventures and technological tie-ups with W. Lucy & Co. of the U.K. and the Danish company Brook Hansen.
Share Holding Pattern:
Presented below is the current share holding pattern of Crompton Greaves. With less than 10% of the stocks being held in public, the company is still largely a private holding company and it is not affected considerably with the sentiments prevalent in the market. The promoters hold nearly 41% of the total equity while other institutions like MF/Banks and Indian FIs hold 36%. The rest of the equity is held by foreign institutions like FII/NRIs/OCBs.
Divestitures took a lead during the first half of the current decade when the company was aggressively selling of its units which were not related to its core business or these units were bought by competitors as it became increasingly expensive and difficult to manage and run them while competing with bigger and established players in the industry.
Some of the Strategic Acquisitions
Crompton Greaves has pursued both organic and inorganic growth to move fulfil its objective of becoming a "full solutions provider". In the past few years, CG has made several strategic overseas acquisitions which has helped it fill the technology gaps and has facilitated its entry into key American and European markets. Moreover it has been able to manage the acquisitions well and has been able to turn around companies which were under financial distress at the time of take over e.g. Pauwels' performance. It has also been able to improve at the operational level of the firms e.g. Ganz.
Pauwels acquisition, 2005
Crompton Greaves acquired Belgium based Pauwels in 2005. Pauwels, established over 60 years ago is "the market leader in the design and manufacture of three-phase distribution and power transformers, in the production and retrofitting of sub-stations and in providing integrated solutions and services for the international T&D market".
Its manufacturing facilities are spread in Belgium, Ireland, Canada, USA and Indonesia and have global distribution. The acquisition not only increase CG product range but also was instrumental in moving the company into top ten producers of transformers in the world.
Ganz acquisition, 2006
In 2006 CG acquired Hungarian based Ganz for an estimated sum of Euro 35 million. The company is involved in the production of high voltage switchgear, power transformers and in the turnkey power projects including substations. It is also involved in designing and manufacturing of asynchronous and traction motors, which complemented Crompton's existing businesses. It was also involved in retrofitting and maintenance of power plants and electrical systems.
Microsol acquisition, 2007
This company was acquired with an estimated sum of Euro 10.5 million. It provided great technological advantage in sub-station automation business. Moreover the company has expanded into a full line developer and supplier of automation equipment and solutions and network enabled products. It added to CG's ability to provide complete solution for world class sub stations with automation and high-end engineering.
Sonomatra acquisition, 2008
It was acquired for a total sum of 1.30 million Euros. It provides on-site maintenance and repair of power transformers and on-load tap changers. It had a synergistic effect on the T&D business of Crompton Greaves.
MSE acquisition in 2008
It acquired USA based MSE power system Inc and its group companies in 2008 for a sum of $16 million. The group was involved in EPC of high voltage electric power systems. The acquisition will strengthen CG as a system integrator particularly in renewable energy segment. The group is also leader in conceptual engineering, system studies and complete EPC engineering.
Crompton Greaves still has some fundamental gaps before it can be called as a Complete Solution Provider. It still lacks and don't have expertise in the areas of MV switch gear, HVDC segment and in industrial drives and automation. It is looking for companies in these areas for acquisition to be called as a Complete Solution Provider.
The acquisitions has not only helped the company to be called as a Full Solution Provider by widening the product portfolio and the increase in the geographical reach being offered by acquisitions but has also provided it with increasing global market share. Much of this increase global share has come from the acquisitions. The company's subsidiaries now account for nearly 47.2% of its net sales and 30.3 % of EBIT.
Slower Economic Recovery: The current macro-environment is not conducive to growth for the entire sector and has also affected CG. Though the domestic Power business has been comparatively resilient, the growths of the companies are heavily linked with the state of the economy. Thus, if the economic revival is slower than expected, it will create risks for our estimates.
Slowdown in the International Business: The Company has significant exposure to the European (around 34% of Revenues) and US markets. The current slowdown has significant effect on these markets. And if the current slowdown persists it can lead to problems in the growth of CG.
Sharp increase in Commodity Prices: Copper, Steel and Aluminum constitute the key inputs for the company. Though CGL has a policy of hedging its exposure with back-to-back contracts, if the commodity prices witness a sharp spike it could still adversely impact overall Margins of the company.
Increasing Competition: Opportunities in the domestic Power Sector have resulted in increasing competition both from the domestic and overseas players. There have been entry of Korean and Chinese players in the markets and it is important to counter the risks effectively.
IN A NUT SHELL
Crompton Greaves (CGL) is a part of the US $3 billion Avantha group, one of the foremost Indian players in Power Transmission and Distribution (T&D) Equipment business. The company is expected to have a CAGR of 13.6% in Top-line and 15.6% Bottom-Line CAGR during FY2009-11E. The current stock price is 244.3 and is being quoted at 17.2x for FY2010E and 14.3x for FY 2011E EPS which is considerably higher compared to its peers like ABB, AMCO, BHEL etc.
Multiple Streams for Revenue - CGL has 3 business segments which contribute to its revenue stream viz. Power Systems, Consumer Products and Industrial Systems. Such a highly diversified portfolio has helped the company to de-risk and as
Power Systems is a high-value, high-Turnover business with a strong global footprint. It is also capital intensive business.
Consumer Products is the fastest cash generator of the company and has second highest margins.
Industrial systems have a strong domestic presence.
Acquisitions and Divestitures - CGL has been pursuing aggressive organic and inorganic growth to achieve its vision of becoming "FULL SOLUTIONS PROVIDER". Throughout the decade the company has taken several strategic initiatives in line with this. In the first half of the present decade it was concerned with divesting loss making companies which did not align with its core businesses like digital technologies etc. In the second half of the decade it has made several strategic overseas acquisitions including Pauwels, Ganz, Microsol etc. They have not only been instrumental in plugging the gaps to become a full solutions provider but also in providing the necessary scale to its operations.
Power Sector as the growth driver - The power sector has been identified as the growth driver for Crompton Greaves to take it to next level. 85% of standalone entity and more than 85% of the consolidated entity comes from Power Sector. Moreover with larger than ever expansion planned for Transmission and Distribution along with improvements of the grid in developing economies and upgradation programme in developed markets, the power segment with continue to be growth driver domestically and globally for the company.