ZIV sale a big positive for Crompton

The last pain point hanging over Crompton Greaves (the demerged industrial business) was its France-based automation unit, ZIV. It has been on the block since the sale of Crompton’s international power business materialised in March this year.


The decision to sell was announced some months earlier, at an estimated deal value of Rs 750 crore. The Street was factoring in for sale completion by the end of FY17. However, according to the company’s filing with the bourses, the ZIV business is being valued at €120 million (Rs 880 crore); analysts had been ascribing an enterprise value of Rs 700–750 crore. As a result, the Crompton stock price zoomed 12 per cent on Monday, to close at Rs 85.80 on the BSE.


Analysts say the premium indicates its likely buyer, Alfanar, has the capability to ensure overall profitability of ZIV’s business. Alfanar, headquartered in Saudi Arabia, is a major player in the electrical manufacturing business. ZIV is currently an operationally positive unit but incurs a loss at the net level.


The other positive aspect is that the deal assures faster closure and is expected to conclude by January 31, 2017; the proceeds from sale of international power business may take another 18 months conclude. Also, the 120 million euro accruing from the ZIV business would be free cash available for Crompton. While for now, the company doesn’t not have any major capital expansion plans, ZIV deal adds to the cash buffer.

However, while all this adds up positively for Crompton’s stock, analysts say the 12 per cent rise on Monday caps the immediate upside. “The stock doubled from its low of Rs 40 because it became more predictable to gauge the quarterly earnings,” says Ruchir Khare or Kotak Securities. “But, from here on, unless earnings improve, there’s not much risk-reward left.”


“Even if the valuations at 18 times the estimated FY18 price-to-earnings appear cheaper than peers, earnings (growth) could be muted, given that the power transmission and distribution capex has reached a peak,” explains Pawan Parekh of HDFC Securities. “Therefore, Crompton’s stock trading at over Rs 80 doesn’t make a good entry point for investors.”

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