CG taps low-cost markets for raw materials

Weighed down by eroding profits and a sharp fall in margins, Crompton Greaves is taking steps to make its operations leaner and improve plant capacity. It posted a 67 per cent fall in profits in the Decemebr quarter, largely on account of higher commodity prices and slump in the European business. It has begun sourcing raw material from low-cost markets and is developing a supply chain in China for metals, such as copper.

The rise in prices of copper (10-12 per cent), steel (six-sevn per cent) and aluminium impacted the company. These constitute 40 per cent of raw material costs. Managing director Laurent Demortier told investors the company was adopting various steps to improve margins. “The margin recovery plan is underway. Our plan to source material from low cost countries is working and we are expecting benefits,” Demortier said.

“We have been able to save about Rs 50 crore in this quarter because of sourcing from low cost markets,” said Madhav Acharya, chief financial officer. Besides, the company has decided to reduce inventory stock to make operations leaner. Along with its cost rationalisation exercise, it is adding capacity to factories in India and Indonesia and setting up a plant in Brazil.

"Our Indonesia plant manufactures transformers, it has already received an order for 500 KV transformer. The factory in Brazil will manufacture circuit breakers. This will enable us to expand in that market,'' Demortier told investors.

"There are opportunities in both Indonesia and Brazil and we are tapping them. Brazil is a fast growing economy. Indonesia is a low cost manufacturing base and we look forward to exporting products from there to Australia and New Zealand,'' Acharya added. Within India, the company is adding capacity at its two plants in Vadodara (lighting) and Bhopal (electronic equipment), and plans to develop India as an export hub.

The company’s order book grew 66 per cent and revenues rose 26 per cent. However, weakened economies in Europe is negatively impacting its business. Europe and Middle East regions account for 35 per cent of company's order book. India contributes 38 per cent and the balance is divided between Americas and Asia Pacific.

"European business is suffering. I can't predict my revenue even when I have orders,'' he said pointing out that a few customers had refused to take deliveries of contracted goods. However the company is expecting additional contracts for transformers from Libya.

"We are targeting improvement in margins and taking short-term and long-term measures,'' Demortier said.

On Wednesday the company stock rose 8.07 percent to close at Rs 143.95.

Although the commodity prices are now showing a down ward trend Crompton Greaves has been unable to reap benefits because of its forward contracts. Chief financial officer Madhav Acharya expects the price drop benefit will come in FY 2013.

According to Nomura Equity Research report Crompton Greaves's overall operating margin fell 8 percent in Q3 2012 over the same period last year. In the power business margin drop was 10 percent, report noted. The company blames higher commodity prices for shrinking margins. In US the company executed USD 50 million dollar (about Rs 250 crore) electrical component contract for a wind farm for zero margin, the company told investors.

Crompton Greaves sold its aircraft to its promoters, the Avantha Group for about Rs 250 crore. The plane was sold at book value. The company was under sharp criticism from investors and share holders for its decision to purchase the plane and its stock took a beating a few months ago.