For CG Power, the trouble started long before it reported serious lapses

Shares of CG Power and Industrial Solutions Ltd have tumbled 36% in the last two trading sessions on news of serious accounting lapses at the company. The stock has been languishing at the lower circuit for the past two days because no one knows the extent of the trouble at the company.

It’s important to note that the market had got wind of troubles brewing at CG Power much earlier. The company’s market capitalization has fallen from around ₹6,000 crore in January 2018 to ₹1,156 crore earlier this week, even before it reported the unauthorized transactions by certain employees on Tuesday.

The fall in the stock’s value in the past two trading sessions, however, pales in comparison. CG Power’s market cap has declined by about ₹400 crore since it reported the unauthorized transactions.

But for the stock, trouble began when the company, in its earlier consolidated avatar as Crompton Greaves Ltd (CGL), aggressively acquired firms overseas. Between 2006 and 2010, it acquired several firms in the UK, France, Ireland, Belgium and Hungary in its bid to become an $8 billion conglomerate in revenue terms, by 2015.

The vision was to compete with multinationals in the power solutions space, but those grand plans have run CGL aground.

What went wrong? The overseas businesses, which accounted for half of CGL’s revenue, were an overhang as the global slowdown began hurting profitability. The industrial segment, which was a drain on cash flows, was earlier funded by its consumer electricals business, which was its cash cow.

But analysts had sensed problems when the demerger of its cash-rich consumer electricals business did not turn out to be a plain vanilla deal. Along with the demerger, the promoter group also cashed out. It sold its entire stake in the consumer electricals business to a consortium of private equity investors for about ₹2,000 crore.

With no cash flow, and debt mounting, the industrial entity CG Power started struggling. The consolidated debt of CG Power was about ₹2,000 crore as of 30 September.

Simultaneously, promoters started pledging more shares. As of 30 June, the Avantha Group had zero stake in CG Power, from 34.3% a year ago. Stranded bankers and lenders such as private equity firm KKR, are now left holding what looks like a dud asset. This happened as a result of these creditors invoking pledged shares of promoters following defaults. A slight twist in the tale is the acquisition of an over 8% stake this year by Bharti (SBM) Holdings Pvt. Ltd, a firm owned by Sunil Bharti Mittal.

For now, the revival of the industrial business looks a long way off, even with a change in board or management. After all, the industrial business in Europe and in India, where CG Power has the highest stakes, is facing a cyclical downturn.