Recommendation - Sell
Average Volume – 162989
Price - 35
Sensex – 4397
52 Week High / Low – 53 / 21

• Power system and industrial system division accounting for over 60% of company’s turnover are showing a negative growth. In the first nine months of the current fiscal, the total revenue of the company came down by 14.64% y-o-y.

• CGL is aggressively restructuring its operations by selling stake in 17 odd joint ventures. However, selling of stake in joint ventures is not likely to affect the main business of CGL.

• Operating losses are on an increasing trend. In the first nine months of the current fiscal, operating losses stood at 12.6% against just 1.3% in the corresponding period of last fiscal.

• The current rally in old economy stocks has resulted in an increase in share price of the company by around 61% in four months. We don’t expect any improvement in performance of the company in near term, which would eventually be reflected in its price. At this price, we recommend a sell.

Company’s business can be divided into four segments, power systems, industrial systems, consumer products and digital. Power, industrial and consumer divisions accounting for almost 90% of sales are facing increasing competition due to surplus capacity and slowdown in demand.

Source: Company

Power systems group accounted for almost 27% of sales and around 94% of export revenue in FY2000. The performance of the division depends upon investment in power sector. In FY2000 and even in FY01, we have not seen financial closure of any major project. There are number of projects in pipeline, but seeing the investment scenario, we don’t see surge in power sector investments resulting in a dismal performance of the division. We believe that negative growth in power systems group is the major reason for fall in sales of the company.

Power systems group accounted for almost 94% of company’s export sales and around 26% of Power Systems Group sales in FY00. CGL is facing intense competition in exports from Chinese companies. This resulted in a decline of exports by 49%y-o-y in FY00. In FY01, the company has not fared any better.

This division accounts for almost 33% of sales. It primarily manufactures commercial motors and alternators. Crompton is one of the leading companies in commercial motors in India. Sales of commercial motors depend mainly upon overall economic performance. With the economy not fairing as per the expectations, we believe that the division will just manage to maintain a status quo.

This division contributes around 28% of revenues. It primarily manufactures ceiling fans and other consumer goods. CGL is a leader in ceiling fans business in India. However, the division faces intense competition from unorganised and other players resulting in a lowering of margins. We believe that the division will continue to grow by over 10%, but would not be able to contribute significantly to the bottomline of the company.

The division contributes around 12% of sales. The division has certain innovative products in its basket like CorDECT, which provides support to WLL technology. MTNL is the major client of the company in India and the division has also good scope for exports. In FY00, the division grew by 146%y-o-y, but posted a loss of Rs134.6mn. We believe that the division will continue to grow by around 60% in next two years, but will achieve break even only in FY02.

At the beginning of FY01, CGL had some 17 joint ventures in India and abroad. In consonance with the restructuring plan suggested by Anderson Consulting and Boston Consulting, the company is exiting all the joint ventures which do not fall in its core competency areas. In first nine months of FY01, CGL has sold its stake in business of low tension control gear unit and faxemail, deriving a net surplus of Rs2272mn. Most of the joint ventures are not significantly related to the main business of CGL and hence exiting such JV’s will not result in any significant benefits.

All the four major areas of operations of CGL are facing surplus capacity and low demand. This has adversely affected the operating margins of the company. Operating losses have gone up sharply in the first nine months of FY01 at 12.6% compared to 1.3% in the corresponding quarter of FY00. With not much change in the business scenario, we do not see any significant improvement in operating margins in FY01 and even in FY02.

Despite all odds, the company’s share price has rallied by almost 61% in last four months primarily because of a rally in old economy stocks. With not much significant improvement in the business fundamentals and mounting operating losses, we feel that there is not much upside potential in the stock from the current levels. We recommend that investors should book profits.