Asset sale termination, bad results hit Crompton Greaves
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Apart from a weak performance in the September quarter, the Avantha Group-owned Crompton Greaves Ltd had other bad news for investors as well. Its long-standing prospective deal to sell its beleaguered overseas power transmission and distribution (T&D) business has fallen through. This decimated already poor investor confidence in the stock, which closed 6% lower on Thursday at Rs62.
About six months ago, the stock had risen when the management signed a share purchase agreement with Pauwels Spaco Ltd, a special purpose vehicle of US-based First Reserve, to sell its power business in Europe, North America and Indonesia. The sale would have trimmed debt and interest costs.
The management’s consolation that a “Plan B” is being pursued for the international power business did little to comfort investors or shore up its stock price.
The company’s consolidated operating performance also missed Street estimates. The Rs83.4 crore operating profit was barely two-thirds of what 10 analysts forecast on Bloomberg and 35% lower from a year ago. This was the fallout of weak revenue traction and rising costs. Obviously, this took a toll on operating margin, which fell by 350 basis points to 5.6%, with the biggest drop coming from the international power segment. A basis point is 0.01%.
Further, interest cost outflow during the quarter was about 2.5 times the year-ago period. This ate into net profit that crumbled from a profit of Rs10.6 crore in the year-ago period to a loss of Rs10.4 crore, after absorbing losses incurred on operations that have been discontinued.
The management did assure a decent order book that would bring in revenues through the next 10 months. But the bigger concern is the unviable overseas T&D business that may only fuel losses in the near term. Fortunately, the company closed the deal on the sale of its automation business.
Yes, the domestic business is doing well mainly on the industrial side, with an increase in order book and revenue. However, analysts believe that capacity constraints at Crompton Greaves in the power segment and strong competition may cap margin expansion. The only bright spot for the company is the continuous order flow from the railway segment.
Be that as it may, Crompton Greaves is saddled with losses in its international business with the sale termination. This will weigh on stock performance in the near term.