Demand surge boosts Crompton Greaves

Crompton Greaves reported two developments this week. The first, its acquisition of Microsol Holdings, an Ireland-based power station automation company, cheered investors and the share price rose substantially. This was followed by its fourth-quarter results that was declared on Wednesday.

Though the Q4 numbers were good, the company was greeted with a 6% drop in its share price. That may be partly due to selling after a sharp spike, but could also be due to a relative growth in profits compared to revenues.

Crompton Greaves is benefiting from the rising demand for the power equipment, industrial equipment and consumer goods it makes. Power equipment, in particular, is doing exceptionally well with sales up by 46% and segment profit up by 73% in FY07. The other two segments are doing exceptionally well, with sales growing over 20%. There has been a marginal slowdown in overall sales in the fourth quarter.

All segments have shown a deceleration, though that in consumer goods has been more pronounced. The nature of Crompton’s business would mean that certain quarters may see fluctuation, due to bunching of orders.

This has not affected its profitability though, with profit before tax in the fourth quarter and full year growing by 57%. But what has played spoilsport is a sharp jump in its tax outgo in FY07, which meant that profit after tax grew by only 18% on a standalone basis and 23.5% on a consolidated basis.

These factors would have affected sentiment as its P/E multiple works out to 31 times based on its consolidated EPS. The higher tax effect will not plague performance during FY08. If Crompton’s sales growth improves and profitability remains stable, then its earnings growth will be much better than FY07.