After losing nearly 33% over the past year, shares of Crompton Greaves Ltd (CGL) jumped 9% to Rs.87.30 on Friday. Amid a dismal outlook in the near term, what sparked investor interest in the counter is Friday’s announcement of an attractive buyback offer at Rs.125 a share—a huge 44% premium to the prevailing market price. Promoters will buy back up to 10% of the shareholding from the open market, which, if successful, will increase their stake in the company to 43.1% from 41.7%.
CGL’s offer was a bolt from the blue. At the consolidated level, there is a net debt of Rs.910 crore on the balance sheet, although the stand-alone entity has Rs.780 crore net cash. Some analysts are sceptical about the intent of the buyback. A little over two-thirds of the promoters’ holding is pledged with lenders against money borrowed. About a year ago, barely 5% of the promoter holding was pledged.
Later, against increased borrowing and declining stock price, the promoters had to pledge more shares. The point to note is that a buyback when the markets are on the ebb and a company’s performance is at its worst is the right time from the promoters’ perspective to consolidate their holding. Besides, an attractive buyback offer serves to lift sentiment and market price. However, one must remember that CGL’s buyback offer in 2009 was not successful as the market price at that time was higher.
The buyback is a neat exit option for investors, given that the stock has fallen continuously in the past year. Further, the stock is unlikely to go anywhere in the near term as the company is still battling several challenges in its overseas subsidiaries, acquired a few years ago.
The subsidiary businesses, accounting for a little less than half the consolidated revenue, continue to see operating losses. Although CGL’s global power transmission business is full of orders, issues such as project cost over-runs, liquidated damages pertaining to some projects and delays and deferrals in clients’ taking delivery of products will weigh down the stock’s price and valuation. According to brokerage Motilal Oswal, the overseas subsidiaries are going through a restructuring phase, which is challenging to monitor, and the stock price reaction to any negative event is significant.
In the stand-alone business, although the power segment is expected to see margin improvement, revenue and profit traction will be seen in the consumer segment.
At the consolidated level, too, the performance has been pathetic—operating margin at 6.9% in the March 2013 quarter is down to nearly half of what it was in the June quarter of 2012.
Besides, with the economy in the doldrums, a recovery in the business fundamentals is unlikely soon.
Analysts say the stock might even retrace its gains after the buyback offer closes.