A subdued growth in volumes in the domestic market, coupled with reduced activity in global business has hit the bottom-line of electric equipment major Crompton Greaves in Q1 FY12. At less than 8%, the company's consolidated single-digit operating margin is probably the lowest since at-least June 2007. Volumes were crippled due to rising competition in India, from domestic as well as Chinese and Korean players. There has also been a slump in fresh orders, especially from PGCIL – one of its largest clients. At the same time, the unrest in the Middle East and African nations has significantly impacted the international business of the company in these countries.
While the decline in profits is uniform across all business verticals of the company, it is the power systems – the largest business segment of the company – that has seen the maximum decline of more than 74%. The margins here alone have slid by nearly 800 bps. Again, a drop in the volumes of its popular merchandise - fans -has impacted the otherwise profitable consumer products segment. Even as sales are hard to come by, soaring expenses, especially those of raw materials have eroded the company's operating margins. Interest costs have more than doubled in percentage terms vis-à-vis the corresponding quarter in the previous year, but the amount per se is not very significant.
Going forward, the company intends to broad base its product offering through the acquisition of Sweden based Emotron Group that is engaged in the manufacture of variable speed drivers, soft starters and shaft power monitors and the US based QEI Inc, provider of automation systems and products for managing electric transmission and distribution networks. The company is also setting up a green field facility in Brazil to manufacture power transformer and HT switchgear. These new initiatives may, however, take some time to generate revenues for the company.
In the near term, however, the outlook looks bleak, at least until Q2 FY12 with orders from PGCIL appearing difficult. Uncertainties on the global front too can lead to pressure on margins further in the near term. As such, an order backlog of . 7,088 crore is simply 0.7 times its FY11 revenues and the company needs fresh orders to prevent a further dent to its profitability.
