Crompton Greaves’ business rejig move arrests value erosion

Our Bureau Mumbai | Updated on January 20, 2018 Published on March 14, 2016


Worst is over for the stock but limited upside in the near term

Crompton Greaves’ move to restructure its business portfolio seems to have had a positive impact on its market performance.

On Monday the stock jumped 6 per cent and was among the top five gainers in A group stocks.

Target price revised

Analysts have either revised their target prices and/or earnings estimates upwards. Edelweiss has raised sum-of-the-parts target price to ₹171 a share from ₹145 earlier (18 per cent revision) as it does away with the negative value for foreign subs and expects the company to exit all losses by FY18.

Motilal Oswal has upgraded its earnings estimates by 15 per cent and 83 per cent for FY17 and FY18 respectively, as it expects lower losses post sale of the overseas power subsidiaries.

Last week, the company announced sale of its overseas transmission and distribution business to US-based private equity firm, First Reserve International for an enterprise value of €115 million or roughly ₹850 crore.

Demerger — game changer

The company also announced demerger of its consumer products business on March 3 last year. Since then stock has fallen only 14 per cent compared to more than 50 per cent value erosion over five years preceding the demerger announcement.

The international T&D sale transaction, which is likely to be completed in the next six months, will include T&D business of Indonesia, US, Hungary, France, Belgium and Ireland but not systems business in US, UK and Brazil. It also does not include its automation and drive business.

The biggest positive in the deal is complete write off of of net debt worth ₹900 crore on the books as on December 31 and be debt-free.

Domestic biz worries

However, the company’s India business too is fraught with challenges. “The retained India T&D business has large technology gaps raising concerns on future growth and shrinking addressable market. While the India industrials division suffers from low orders awaiting pick up in Railways/ industrials which may be back-ended,” JM Financial pointed out.

The company’s standalone revenues de-grew 8 per cent year-on-year in the nine months ended December, while reported net profit declined 43 per cent in the same period. But these challenges are not as grim as the international operations, which affected consolidated financial performance — sales down 13 per cent and loss, compared to profit in same quarter last year. Hence, analysts expect the worst seems to be over for the company and the stock.

The stock provides limited upside potential of 16 per cent in the near term given the average one year target price of ₹180 estimated by five brokerages namely Nirmal Bang, Motilal Oswal, Edelweiss Seucirites, Religare Institutional Research and HDFC Securities post the deal.

Published on March 14, 2016
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