A research report by Chirag Muchhala of Jaypee Capital Services Ltd mentions that the peak power deficit, at 16.6%, is at a multi-year high. With demand for power expected to grow at 8-10% annually, power supply will face even greater strain.
Trehan says this is as an opportunity waiting to be tapped. And investing in power makes sense for Crompton because it is a field related to its main business, he says.
“We understand power. We supply equipment to power companies. There is a knowledge within the company on power,” Trehan says.
Avantha Power, by virtue of the equity infusion by CGL, has managed financial closure for its 600MW power plant in Korba, Chhattisgarh. The Rs2,850 crore Korba power project tied up Rs2,135 crore of financing, with the balance Rs750 crore infused as equity, making up a debt to equity ratio of 3:1.
Avantha is, however, not resting on one project alone. In the near future, it will look at setting up another 600MW power generation facility in Korba, and two plants of 600MW in Jhabua in Madhya Pradesh.
For the funding of the new projects, the company will approach private equity investors, among others.
“We have the option to invest more, but we will like to maintain our (CGL) stake at 26%,” Trehan added.
Analysts tracking CGL are, however, concerned over the diversification.
“Though the investment by CGL was made at book value, it has raised investor concerns as the shareholders’ approval was not taken for the same,” Angel Broking analyst Puneet Bambha wrote in a 12 June report.
“Nevertheless, post CGL’s investment, the Korba project has made good progress... Thus, going ahead, we believe that developments on the Avantha Power front would be closely observed by the investor community.”
Muchhala of Jaypee Capital wrote in his 30 May report: “We believe that such non-core investment was made in order to enable the Korba project to reach financial closure as banks disburse funds in proportion to equity contribution.”
Trehan, 62, who joined CGL as a management trainee in 1972, took charge as managing director of the company in difficult times. Costs had spiralled and the company diversified into unrelated businesses including manufacturing telecom equipment.
Under him, the company cut its workforce from 10,800 people to 5,800, and slashed several rungs from the management tier. There were 18 levels to reach the CEO’s position that Trehan and his team halved to nine. By 2002, the restructuring enabled the company to return to profit.
CGL is present in the same segments as vastly bigger European firms such as Siemens, ABB and Areva T&D.
In a bid to bridge the technological gap and get a foothold in the developed markets of Europe and the US, CGL made four acquisitions in four years. Muchhala’s report says the company was valued at a steep discount to its peers before issues such as technology gaps were addressed.
The acquisitions helped. In a span of four years beginning 2005-06, CGL revenue expanded at a compounded annual growth rate of 44.8%, aided primarily by surging domestic demand coupled with contributions from overseas.