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After Crompton Greaves (CG) fell out with investors over its aircraft purchase and poor quarterly numbers last July, it has done several things to win back confidence. From acquiring companies abroad to trimming headcount to improving efficiencies, CG, part of the Avantha Group, has done it all this year. While these actions are yet to reflect in its bottom line (net profit for the second quarter fell 64 per cent), the management insists it is doing the right things. For starters, the company is attempting to go up the value chain in the power equipment manufacturing business by producing value-added products.
With the acquisition of smart grid automation firm ZIV in Spain this July, CG is only among four players that have an entire suite of offering in smart grid automation. Given that demand for power transmission and distribution (T&D) equipment is expected to grow at a compounded annual rate of 4.8 per cent over 2011-15, CG is expected to fare well with the acquisition of ZIV.
By the end of this financial year, it expects to complete integration of operations in Belgium and Hungary and make the latter the hub for its transformer manufacturing; staff costs in Belgium are seven times higher. The company has cut its headcount in Belgium and is raising capacity at Hungary, which is emerging as the global hub for automobile, pharma and capital goods manufacturing companies. Nomura believes cost leadership is the only way to gain market share and sustain profitability in the segment. The brokerage expects the company's target of raising margins by 500 basis points over the next three years will be key to gaining market share in this segment globally.
Given that the transformer business is becoming commoditised, CG is looking at cutting costs and going up the value chain. According to HSBC Global Research, the focus is on doubling transformer capacity, creating a uniform design platform and enhancing product range. Through this production hub, CG seeks to capture the T&D equipment market in West Asia, Brazil and Russia.
While on paper this strategy of improving efficiencies by raising production in Hungary sounds good, analysts say catering to West Asian markets like Saudi Arabia would push up logistics costs. Bank of America Merrill Lynch says: "The Hungarian plant will now manage exports to the Middle East. This would entail greater logistics challenges, the risks for which are not adequately built in."