In May’15 we came across news of proposed de-merger of Crompton Greaves (CG) Ltd by transferring Consumer Products business into Crompton Greaves Consumer Electricals (CGCE) and listing it separately on exchanges with each shareholder getting 1 share of CGCE for every 1 share held in CG.
Before de-merger, besides the consumer products business, CG also had other businesses like Power systems and Automation and Industrial systems. So, while the performance of consumer electrical business was extremely good, the other businesses were overshadowing the performance of consumer business with their losses. The losses were also mainly at International units while the domestic units were operating satisfactorily.
Besides de-merger, management had also indicated that they would like to sell off loss making international units and focus on profitable units.
So, sensing an opportunity of value unlocking with separate listing of CGCE, we initiated an opportunity on Crompton Greaves around 169/- odd levels for our Alpha +/Alpha + and Model Portfolio members on 1st Jun’15.
Yesterday, we finally closed the opportunity around current levels of 198-199 (cumulatively for CG and CGCE with CG around 66.50 and CGCE around 132-133) with gains of ~17.5% in 12 months.
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For those interested in participating in similar Special situation opportunities, we have produced below the detailed note on Crompton Greaves and Crompton Greaves Consumer Electricals de-merger opportunity shared with Alpha + members on 1st Jun’15.
Disclosure: The special situation opportunity on Crompton Greaves and Crompton Greaves Consumer Electricals stands closed and we don’t have any holding in the stock. This note is educative and for the purpose of information only.
Alpha Plus: Crompton Greaves Ltd (NSE – CROMPGREAV) – Value unlocking on demerger of Consumer Products business
We have released 1st Jun’15: Special Situation opportunity on Crompton Greaves (NSE Code – CROMPGREAV). The same has also been produced below.
We believe there’s a case of value unlocking in Crompton Greaves on account of proposed de-merger of Consumer Products business and expected sale of international power businesses and would like to share with you details on the same.
Consumer Products business demerger
Currently Crompton Greaves (CG) has several business segments which are: Power Systems, Automation and Industrial systems and Consumer Products. Crompton Greaves has recently announced a Scheme of demerger of the Consumer Products Business Unit of the Company into CG’s wholly owned subsidiary Crompton Greaves Consumer Electricals Limited (CGCE). As per the scheme, Crompton Greaves Consumer Electricals Ltd will be demerged from Crompton Greaves into a standalone company and, consequently, listed on the National Stock Exchange and BSE.
The Scheme consists of 100% vertical demerger of the Consumer business as existing shareholders of CG will get 1 new share of CGCE for every 1 share held by them in CG.
Consumer Products business
In the Consumer Products business, CG has carved out robust brand equity and has been clocking good revenue and profit growth at very high returns on employed capital. CGCE has grown at a compounded rate of 16% per year over the past six years and generated revenue of Rs 3,232 crore in FY 15, with PBIT of 407 crores, PBT of 397 crores and PAT of 270 crores. The company has expanded its reach in the consumer business to 134,000 retailers in the distribution segment and 22,000 retailers in rural segment. The company commands more than 25% market share in the fans business and holds an overall No. 3 position in the Indian Lighting market. Since the last 3 years the company has reported higher growth and profitability in comparison to companies like Havells and Bajaj Electricals.
The Management is targeting 6000 crore sales for CGCE by FY 18 at an EBITDA margin of 14% against 11.9% recorded in FY 14.
Considering the strong brand equity, consistency, high returns on investment and valuations of other similar companies, we expect CGCE to trade at ~25-30 times earnings once it gets listed. Assuming a moderate growth of 12-15% for FY 16, the company is likely to list at a market capitalization of 8000-8500 crores.
Power, Automation and Industrial Systems
The Power and Industrial systems business consists of Power T&D, Motors, generators, drives and Automation Systems. Company’s customer segments include Power and Utilities, Railways, Oil and Gas, Mines and Minerals.
In the Power T&D the company has over 100,000 MVA power transformer capacities globally. In the power conversion business, CG is the No. 1 rotating machines player in India and in the automation solutions, CG has 1.5 Mn p.a. smart meters capacity with transmission and distribution solutions.
In the power and industrial systems business, CG has both Indian operations and subsidiaries in several countries and derives 35% revenue from India, 12% from South East Asia, 35% from EMEA (Europe, Middle East and Africa) and 12% from North America.
On Standalone basis, the company reported 285 crore PBT for FY 15 from the power and industrial systems business, while on the consolidated basis the PBT is zero on account of losses in the overseas power systems business, especially in the North American Market.
Revival in Power and Industrial systems business – As per the management there are already signs of revival in the industrial and automation systems business with good order flow and relatively better margins. Similarly, in the domestic market as well the order flow in the power systems business has improved and is likely to report much better numbers going ahead.
Contemplating sale of international power segment business – In the international market, the losses in the power systems market have continued, however recently company shared an important piece of information regarding the same i.e. they have received non-binding proposals from reputed international entities for acquiring the European, North American and Indonesian activities of the power segment division of CG.
The company is reviewing the above offers with the Board’s strategic intent of focusing on profitable India businesses and global automation business.
We believe, if the CG is able to execute the sale of international power business, it will make the company lean in terms of balance sheet, improve its profitability at both standalone and consolidated level and make it more focused on relatively higher margin automation business.
Consensus estimates on earnings – As per the consensus estimates on earnings, CG is expected to deliver consolidated PBT of ~1000 crores in FY 16. Now, excluding the consumer products business as the same will be demerged, CG is likely to deliver PBT of ~500-600 crores for FY 16.
With the sale of international power businesses, the earnings growth could be even higher.
We believe both the demerger of the consumer products business and the proposed sale of international power businesses can result in value unlocking for CG shareholders from current levels.
On the standalone basis, CG and CGCE can individually command market capitalization of ~5000-6000 crores and ~8000 crores respectively against the current combined market cap range of 10,500-11,000 crores.
Further, at current valuations, the downside seems low, even if the performance of CGs power and industrial systems doesn’t improve much.
Delay in the entire demerger process or non-approval (extremely low probability) can result in an opportunity cost for the investors.
If the company is unable to sell off international power businesses, the losses at international subsidiaries can impact the profitability and the valuations of the power and automation system businesses.
Persistence of sluggishness in the domestic power industry can impact the domestic power business of the company and its profitability.
The above note was shared with members on 1st Jun’15.
Disclosure: I don’t have any investment in Crompton Greaves and Crompton
Greaves Consumer Electricals
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