Crompton: succour from sale of ailing overseas business
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Sometimes it is better to chop off a decaying limb of a company, especially when it starts to infect its more profitable businesses. Avantha Group-owned capital goods firm Crompton Greaves Ltd (CG) has done precisely this. On Wednesday, it inked an agreement for the sale of its international power business for €115 million (around Rs.850 crore) to a US-based private equity fund which is likely to be completed in the next six months.
This brings a ray of hope for investors in the beleaguered firm. For 17 long quarters, CG’s international operations, which comprised about half the consolidated business, have incurred losses. Worse, total borrowing continued to rise, while the international business—built through acquisitions—failed to churn out cash. Over a period, the losses from the overseas operations pulled down the company’s overall performance too.
For the December 2015 quarter, CG posted a net loss of Rs.107 crore, from a sizeable profit in the year-ago period. Not surprisingly, the Street reacted adversely to the results and the stock, which was outperforming the benchmark indices earlier, fell 30% in 10 days.
Against this backdrop, investors welcomed the news of the sale. The CG stock rose by about 9% on Wednesday, after it was known that the proceeds will straightaway pare debt of Rs.900 crore. The stock fell 0.63% on Thursday.
It does not matter that there will be no cash inflows to CG. What’s important is that the ailing businesses—spread over the US, France, Ireland, Hungary, Belgium and Indonesia—are finally out of the company’s turf.
That said, some of the power businesses will remain part of the Indian operations. But with this deal, CG’s travails will be over. The stand-alone business, apart from being profitable, is debt-free. What remains to be recouped is traction in domestic revenues.
A report by JM Financial Services Ltd points out that the firm’s industrials business has been working at a low 50% utilization due to dearth of orders. Recovery depends on industrial and railway capex, both of which are some time away.
For now, the business, which weighed down valuations (analysts had given the international business a negative valuation), is off CG’s back. Future prospects will hinge mainly on the steps taken to recoup and grow.
The writer does not own shares in the above-mentioned companies.