Crompton Greaves: Margins under pressure, but order inflow improves

While order cancellations in the power sector weighed heavily on the performance of BHEL in the quarter to December 2011, execution of certain projects at near zero margins, again, in the power sector, crippled the operating margins of Crompton Greaves during the same period compared to a year ago.

Despite having reported a growth of close to 26% in consolidated revenues during Q3 of FY12 YoY, the EBITDA margins of the company fell by more than 800 basis points during the period while net profit was lower by 67% in Q3 FY12 from the year-ago period.
The company has attributed more than 62% of this decline in EBITDA margins to the execution of its near zero-margin, systems project on its international business and the rest to the impact of a rise in raw material costs. However, the fact that Crompton has liquidated its inventory worth approximately 300 crore in Q3, at the best available market prices, also appears to have dented its margins during the quarter.

Lack of orders in the power sector and intense competition have clearly impacted the price negotiation power of engineering companies resulting in a severe margin squeeze-out.

Thus, even though the management of Crompton Greaves refrained from making any revisions to revenue growth and EBITDA margin guidance for FY12, what is missing this time is the confidence in asserting that the guided margins will be met.

The company had provided for a guidance of 10-12% growth in consolidated revenues and EBITDA margins at 8-10% for FY12. For the nine months ended December 2011, it has already achieved 73% of its targeted revenue growth and appears well placed to meet its revenue growth guidance given a healthy order backlog of over Rs 8,000 crore.