NSE Symbol: | BSE Code: | ISIN: | Sector:
- Add to Portfolio
- Add to Watchlist
- Add to Alert
In my letter to you last year, I had begun with the following words: "The history of all growing global corporations is replete with instances when events have required a strategic change of gear. FY2012 was such a time for your Company. After a decade of rapidly growing revenues, EBIDTA, EBITand PAT that made Crompton Greaves the cynosure of many eyes, there was a sudden break in the momentum."
Thereafter, I had explained why this break had occurred, and what the management was proposing to do to address the issues.
The turnaround continues and is part of an on–going process of globalisation of CG's transmission and distribution (T&D) and the Industrial Systems business.
There have been different challenges for these two businesses. For T&D, with its global manufacturing and customer footprint, we need to organise and run it as one global entityencompassing design, manufacturing, sourcing and creating power systems and solutions for our customers. For Industrial Systems, with its more domestic footprint, the challenge is to leverage India as a competitive hub for internationalising significant parts of the business.
These are significant challenges. Meeting these and restructuring operations in an environment of much slower global economic and investment activity have led to a muted financial performance for your Company.
Let me start with the results.
i. Net sales and services grew by 7.5%from Rs. 11,249 crore in FY2012 to Rs.12,094 crore in FY2013. This was a positive, with your Company's net turnover rising to above US$ 2.2 billion.
ii. Greater pricing pressure for power sector products, higher materials–to–sales ratios and operational issues in some overseas locations led to a 52% decline in earnings before interest, depreciation, taxes and amortisation (EBIDTA) excluding other incomefrom Rs.804 crore in FY2012 to Rs.383 crore in FY2013.
iii. Including exceptional items, which involved a one–time cost of Rs.121 crore for restructuring and right–sizing operations at Mechelen, Belgium, profits before tax (PBT) for FY2013 was Rs.64 crore. Also embedded under the various operational heads are incidental costs involved in the Belgium restructuring, aggregating to Rs.108 crore, which are also one–time in nature, thus resulting in total restructuring costs of Rs.229 crore (33 million).
iv. Profit after taxes net of minority interests and share of profit/loss of associate companies (or PAT) declined from Rs.374 crore in FY2012 to a loss of Rs.36 crore.
You deserve to ask "Why so?" And get an honest answer, which is what this letter and the chapter on Management Discussion and Analysis are all about.
Simply put, your Company's T&D division's overseas power businessCG
Power Overseas, which accounts for 65% of Crompton Greaves' Power Systems and 39% of its consolidated salesperformed below par. Despite a significant growth in its unexecuted order book and a slight growth in net sales, CG Power Overseas closed FY2013 with a loss of Rs.244 crore at the EBIDTA level. PAT of the overseas legal entity, in which CG Power Overseas accounts for the lion's share, was down to (–) Rs.475 crore.
There are external and internal reasons for such a performance. On the external front, global transmission and distribution (T&D) markets became even more competitive, especially in advanced countries as well as in Middle East and North Africa. Suppliers continued to offer low prices to secure orders and maintain capacity utilisation. As I write, it is difficult to predict when prices will return to more healthy levels across key global markets.
Second, while raw material prices softened in the second half of FY2013, their beneficial effects are yet to show up in costs. This is because most of the orders in the pipeline across CG Power's overseas manufacturing locations were taken in FY2012 or the early part of the FY2013and the material cost structures have been locked in at higher prices. Going forward, the T&D global structure will mitigate this by commodity price hedging and supply chain efficiencies. I look forward to greater traction on this account in FY2014.
Third, FY2013 has seen the continuation of a trend that showed up in the previous year where many customers delayed taking physical delivery of their transformers or substations. This, in turn, blocked scarce factory space, slowed down production lines, prevented timely revenue recognition, locked up working capital and reduced ROCE.
The fourth cause is internal to CG Power Overseas. Throughout FY2012 and much of FY2013, production of several power transformers overseas got delayed on account of various operational factors. On occasions, these delays led to imposition of liquidated damages by customers.
The Company correctly opted to right–size operations at Mechelen due to its high costs, overcapacity of power transformers in western Europe and a continuous price drop for power transformers in the EMEA region. This was carried out in the third quarter of FY2013 at a one–time cost of Rs. 121 crore. It also meant shifting a large part of the order book from Belgium to Hungary, which led to some teething troubles. As I mentioned earlier, also embedded under various operational heads are incidental costs involved in the Belgium restructuring, which amount to Rs. 108 crore, and are also one–time in nature, thus resulting in total restructuring costs of Rs.229 crore ( 33 million). However, the restructuring in Belgium should result in an annual savings of 14 millionof which 1.5 million was visible in the fourth quarter of FY2013.
Let me stress that the financial problems of your Company were almost exclusively on account of CG Power Overseas.
i. CG Power India has done well, despite facing a difficult economic environment. In FY2013, it earned an EBIDTA of Rs.260 crore; and EBIT of Rs.231 crore and an ROCE of 29.5%. CG's plant T3 at Mandideep, near Bhopal, has produced and tested and dispatched 108 power transformers since September 2011. Most of these were in the high technology 765 kV category. In addition, the T1 plant at Kanjur (Mumbai) profitably produced and despatched 260 units during the year under review.
ii. Similarly, on a net sales of Rs.1,835 crore, CG's Industrial Systems (India and overseas) earned an EBIDTA of Rs.251 crore; an EBIT of Rs.214 crore; and an ROCE of almost 25%. It also commissioned and started production at the new manufacturing facility for large motors and synchronous generators at Mandideep.
This 9,284 square metres plant is equipped with world class machines and process technologies and has a capacity to produce 250 large motors and synchronous generators. This is the first facility we have built at CG with global markets in mind. It is our first step in the globalisation of our Indian manufacturing capability. Going forward, we will build on its success in other areas.
iii. CG's Consumer Products business, too, did well. It notched a 21.5% growth in the top line to Rs.2,593 crore; earned an EBIDTA of Rs.287 crore; and EBIT of Rs.278 crore; and still clocked an enviable three–digit ROCE of 252%.
How does the management propose to effect the globalisation of CG Power and thus bring about the turnaround?
Four factors are paramount. The first is productivity, which has to do with first–time–right design, correct slotting of transformers in the product lines, and faster throughput. A major global initiative has been launched on this front with a focused team at the helm. It has shown results in India; and is beginning to get traction in Indonesia, the USA and Hungary. However, such changes will take time to be fully operational. It is in the nature of a transition to being globally world class.
The second factor relates to bringing about significant and consistent improvements in global raw material sourcing and supply chain efficiencies which, without a global business structure, cannot deliver visible gains. The process has begun. But we have a long way to go. As your chief fiduciary, I shall carefully watch this development.
The third has to do with Europe and the Middle East, and relates to how Hungary will take up the challenge. We took a conscious decision to right–size an expensive facility in Belgium, and significantly raise capacities in a more competitive plant at Tapioszele in Hungary. The plant has already expanded capacity from 7,500 MVA per year to 10,000 MVA; and a further expansion to 12,500 MVA is going on. It proved its mettle in successfully producing and despatching several transformers that were transferred from Mechelen. Hungary must now consistently demonstrate that the Company's faith in its capabilities are well founded.
The fourth has to do with the quality of the order booknot just for power transformers and allied products but also for systems revenues. As I mentioned in two of my earlier letters to you, CG Power has to become an end–to–end solutions provider by offering full fledged power systems and substations instead of standalone equipment. Several successful projects in continental Europe as well as the Humber Gateway project in the UK have demonstrated that CG can tap into this growing market.
We must be careful in choosing the right projects. These should come with attractive prices and a good pull–through for CG's T&D equipment as well as power automation. Moreover, we need to further strengthen project execution skills, so that we complete the work on, or before, time; and at costs that in line with, or less than, budgeted. I look forward to seeing more of the systems and solutions business, and to earning larger profits through this value added consolidation.
Let me now touch upon ZIV, which your Company acquired in FY2013 for an enterprise value of 147 million. We purchased ZIV to complete the front end offerings in the smart grid segment of the T&D market where we neither had a suite of products and solutions nor the technology. Without this most basic building block, we would have been shut out of some of the most promising areas of growth in the coming years, especially in our Indian markets.
In the eight months of FY2013 post–acquisition, ZIV's top–line was less than what its management believed was possible for the year. This was due to a massive slowdown in orders, especially in Spain.
I expect ZIV to do better in FY2014. There has been a tremendous work done in integrating the existing automation offerings of ZIV in CG's suite. Given a new focus on globalisation outside west Europe, and the integration of its various products with other automation products and solutions, CG power automation would sell these offerings as solutionsboth for Power and for Industrial Systems worldwide.
If you will recall, I was hopeful last year. So am I today. The process of globalising a major business such as T&D does not get completed in a single year. A major, full fledged restructuring for creating a greater and more efficient global footprint takes time.
Excellent people across CG have got together and focused on doing what is needed. We have seen this in action. When I ask our employees at CG, "What would make us successful in completing this restructuring?", the response is always "We are ordinary persons committed to doing an extraordinary job!" Recall that Industrial Systems had problems last year; it has turned around. So too Consumer Products. CG Power India continues doing well; as does Indonesia. And we have secured tremendous orders throughout the world.
There is no reason why your Company's global management team cannot effect the turnaround in FY2014, and deliver better results for the shareholders. I am hopeful of seeing definite signs of steady progress and improved financial results.
This Company had an outstanding decade. We need to get back to another decade of superior performance. It is possible. The management exists. And we will get there.
As always, thank you for your support.