Mumbai: In March, when electrical equipment maker Crompton Greaves Ltd (CGL) decided to acquire a 41% stake in group company Avantha Power and Infrastructure Ltd for Rs227 crore, its minority investors were alarmed.
Shares of CGL, a Thapar group company, plunged to a 52-week low of Rs99.70 on 26 March.
Logical view: Managing director S.M. Trehan says investing in power makes sense for Crompton as it is a field related to its main business. Ashesh Shah / Mint
“We were misunderstood,” said S.M. Trehan, managing director of CGL, in an interview on Tuesday. The CGL shares “had gone for a six” after the announcement, he said.
Concerned by the “kneejerk reaction”, the board proposed a buy-back at Rs170 per share, a handsome premium of 70%. It was aimed at bolstering investor confidence and give an exit to those who had been fretful of the move.
For CGL, it was a sound investment that would help it diversify into the related field of power generation, a potentially lucrative business in a country perennially short of electricity, as it attempts to cross $8 billion in revenues by 2015 and close the gap with global peers such as Siemens AG of Germany.
CGL minority shareholders perhaps had a reason to react like they did. In mid-December, Satyam Computer Services Ltd proposed the $1.6 billion acquisition of Maytas Infrastructure Ltd and Maytas Properties Ltd, promoted by the family of founder-chairman B. Ramalinga Raju.
An investor backlash forced Satyam to reverse the decision hours later. On 7 January, Raju confessed to having doctored the books of the company for several years to the tune of Rs7,136 crore, triggering India’s worst corporate governance scandal.
“Just because Satyam happened, you can’t put every corporate in the Satyam basket,” said Trehan. “Satyam made investors understand us wrongly.” The confidence of shareholders was restored only when they realized that the Avantha Power stake was being purchased at book value and after CGL offered to buy back shares at a premium. Not a single share had to be bought through the buy-back. CGL shares soared, and on Wednesday gained 5% to Rs290.25.
CGL operates in three business segments—power systems, consumer products and industrial systems, with power systems contributing almost half the company’s revenue and profits.
The Avantha investment is the start of a “fourth vertical” for CGL in the power sector, Trehan said.
“We are wetting our feet. It is a running company generating 165MW of power and the investment was made at a book value of Rs11 per share. The markets understood...the valuation was good,” Trehan said.
Trehan is betting that power shortages, a chronic phenomenon in India where demand always stays ahead of supply, will persist for at least the next 10-15 years.
“No way is this country going to be self-sufficient in power,” he said. “Any company entering the power sector has a window of 6-8 years to make good money.”