investors eye

stock update

Crompton Greaves Reco: Hold

Stock Update

Relief from overseas pain CMP: Rs152

Company details Key points

Price target: Rs165 S

ale of international T&D business; a relief from overseas pain: Crompton
Greaves Ltd (CGL) has accepted an offer from First Reserve International
Market cap: Rs9,527 cr Ltd, a US-based private equity fund, to sell its international transmission and
distribution (T&D) business. The business to be sold includes T&D business
52-week high/low: Rs203/113
present in the European, North American and Indonesian subsidies. The total
NSE volume: 37.0 lakh consideration for the deal is Euro 115 million, of which Euro 85 million will be
(No of shares) paid on closure of the deal and remaining Euro 30 million over the period of 18
months. Apart from selling the international T&D business (thin profitability),
BSE code: 500093
its overseas solutions business (incurring losses) is under the process of closure.
NSE code: CROMPGREAVE Further, CGL is in the process of finding a buyer to sell the automation (ZIV)
business. Consequently, only the drivers business will remain in its overseas
Sharekhan code: CROMPGREAVE portfolio.
Free float: 41.1 cr Implications of the deal: We believe the deal is a positive surprise for the
(No of shares)
Street, as the company can manage to get rid of a major part of its problematic
international business. The likely implications from the deal are; 1) the loss
Shareholding pattern
from overseas business is expected to go down substantially by roughly Rs250
crore; 2) the proceeds from the deal worth Rs850 crore would be utilised to
Others pay-off a large part of the current net debt of Rs900 crore, resulting in a sharp
16% drop in interest cost; and 3) we expect some write-off related to the loan and
Promoters advances given to these sold-off entities (around Rs1,200 crore), though the
35% management is evaluating various options now. On the qualitative aspect, we
believe the complete focus of the management will be now on its domestic
business.
DII
31% View & valuation: The management expects the deal procedure to take around
FII 18 months and indicated that the potential saving from the deal could be
18% around Rs200 crore, which will reflect positively, partially in FY2017 and fully
in FY2018. With proceeds from the deal utilised for debt repayment, we value
Price chart the retained domestic business at Rs60 per share, based on 10x its FY2017
earnings before interest, tax, depreciation and amortisation (EBITDA). On the
220 other hand, we expect the value of its demerged consumer business (record
200 date on March 16, 2016) could range from Rs100-110 per share, based on 15x
180 its forward EBITDA. However, lack of clarity related to a potential write-off
160 in loan and advances given to the sold-off entities remains. Consequently, we
140 have retained our Hold rating on the stock with a revised price target of Rs165.
120
Valuation (stand-alone)
100
Particulars FY13 FY14 FY15 FY16E FY17E
Nov-15
Jul-15
Mar-15

Mar-16

Net sales (Rs cr) 7,135 7,490 7,837 8,058 8,735

Operating profit 595 666 605 596 668
Price performance OPM (%) 8.3 8.9 7.7 7.4 7.7
Adj PAT (Rs crore) 446 522 471 465 517
(%) 1m 3m 6m 12m Adjusted EPS (Rs) 7.1 8.3 11.7 7.4 8.2

Absolute -22.1 -30.9 -19.0 -23.9 Y-o-Y growth (%) (11.7) 17.0 40.1 (36.4) 10.9
PER (x) 21 18 13 20 18
Relative
-18.7 -24.0 -12.6 -7.4 RoCE (%) 25.4 23.3 18.5 12.9 14.3
to Sensex
RoNW (%) 14.6 15.5 18.2 10.4 10.4

# stand-alone valuation includes domestic business and demerged consumer business, which will be listed separately soon

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investors eye stock update

(Rs cr)
Valuation - Stand-alone power & industrials FY14 FY15 FY16E FY17E
Sales 4,643 4,604 4,373 4,534
PBIT 413.27 336 227 287
Depreciation 77 84 88 97
EBITDA (estimated) 491 420 316 383
EV/EBITDA multiple 10
Estimated EV 3,832
Net debt post repayment from the proceeds of deal 100
Estimated equity value 3,732
Value per share (Rs) 60

(Rs cr)
Valuation - Consumer business FY14 FY15 FY16E FY17E
Sales 2,847 3,233 3,686 4,202
PBIT 337 407 405 483
Depreciation 12 12 12 12
EBITDA (estimated) 349 419 417 495
EV/EBITDA multiple 15
Estimated EV 7,279
Net debt 700
Estimated equity value 6,579
Value per share (Rs) 105

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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