Major relief for Crompton Greaves

It has been back-to-back gains for Crompton Greaves. First, it firmed up on the demerger of its consumer business, which lit up its stock price by 12 per cent. Now, the sale of its international power business reaching a closure lifted its stock by nine per cent on the bourses on Wednesday.

The company's international business valued at €115 million or Rs 850 crore and sold to US-based private equity First Reserve International on a cash and debt free basis, will give the much-needed respite to Crompton Greaves. Most analysts were not attributing much value to the international power business, given its 20 quarters of cash-loss record. Earlier, expectations were that sale of this business would not fetch more than Rs 400-500 crore. However, now realising Rs 850 crore, analysts at Kotak Research attribute a fair value of Rs 40-45 a share to the power and industrials business (non-consumer business) against its earlier valuation of Rs 22-28 apiece. Motilal Oswal Securities, too, has revised its FY17 earnings per share target from Rs 3.8 for its non-consumer (power and industrials) business to Rs 5.3.

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Although the money will come in a staggered manner, it will help Crompton cut its debt burden significantly from Rs 900 crore as on December 31, 2015 to nearly zero. Its management has guided for zero interest cost with the closure of the sale. Most importantly, the company’s profitability would get a boost. If these assets are excluded, the management said theoretically it would add Rs 350 crore to profits in FY16.

Following its sale, in FY17, while Crompton Greaves now expects to clock revenues of Rs 6,500 crore (down 35 per cent compared to FY15 revenues, largely due to sale of international power business) from the non-consumer businesses, net profit is pegged at Rs 325 crore; up 55 per cent compared to FY15. With the automation business also expected to be sold in FY17, its overseas exposure will be restricted to drives and rotating machines business, which are value-accretive. That said, the fate of Rs 1,200 crore worth of loans advanced by Crompton to its international entities is the only overhang, where it might have to take a write-off if no effective means of handling the same is discovered. For now, the Street is building in zero recovery from these.

Going ahead, with the budgetary push for infrastructure sector and prospects for the domestic non-consumer business inching up, FY17 holds promise for Crompton Greaves.

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