Recommendation: Buy
CMP = Rs 880
Price target: Rs 1,008
- The revenues of Crompton Greaves grew by 37.3% in Q3FY2006 to Rs 647.9 crore. The growth was achieved on the back of the strong performance of power systems (revenues up 60.6%) and consumer products (revenues up 21.5%).
- The power system and consumer product divisions were the key drivers of the company's good performance in Q3FY2006. The profit before interest and tax (PBIT) margin of these divisions improved by 250 basis points and 60 basis points yoy to 9.7% and 8.8% respectively.
- The net profit of Crompton grew by 73.3% yoy in the quarter to Rs 54.7 crore. There was an extraordinary expense of Rs 11.5 crore on account of a voluntary retirement scheme (VRS).
- Crompton is currently trading at 14.0x FY2008E consolidated earnings. A healthy compounded annual growth of 44% in the earnings over the FY2005-08 period, the strong visibility of the earnings and the improving financial ratios of the company make the stock an attractive investment.
- I maintain Buy recommendation on the stock and roll over the earnings multiple to FY2008E with a price target of Rs 1,008, discounting the FY2008E consolidated earnings by 16x.
DCM Shriram Consolidated
Recommendation: Book Profit
Current market price: Rs 98
- In Q3FY2006 the revenues of DCM Shriram Consolidated Ltd (DSCL) grew by 18.4% aided by a volume growth. The capacity expansion undertaken by the company in the last one year increased the volumes of its chemical, plastic and sugar businesses. The turnover from the traded goods increased by 10.5% to Rs 242.4 crore.
- The chemical business, which had been driving the company's growth for the last two quarters, reported a dull performance. Though the revenues from this business grew by 4.9%, a drop in the caustic soda realisation affected its profit before interest and tax (PBIT) margin.
- The sugar business reported a healthy growth of 77.4% in the top line, as the company expanded its capacity. However, the sugar division's PBIT declined by 6% during the quarter due to the high cost of the inventory carried forward from last quarter. The company is further expanding its sugar capacity from 14,000 tonne crushed per day (tcd) to 33,000tcd.
- The plastic business reported revenues of Rs 63.2 crore in Q3FY2006 as compared with Rs 55.2 crore in Q3FY2005. Weak polyvinyl chloride (PVC) prices and higher input cost caused the PBIT of this business to decline from Rs 16.7 crore in Q3FY2005 to Rs 8.3 crore in Q3FY2006.
- DSCL reported a 24.5% year-on-year (y-o-y) decline in its net profit to Rs 24.8 crore. The stock has appreciated by 113% since then. Hence I recommend booking profit on it.
