Crompton Greaves Consumer Electricals Ltd- Demerged, independent and professionally managed business

Lately I found this stock worth buying and would like to share my reasons for this view.

Crompton Greaves is an electrical behemoth with more than 2 Billon Dollars sales. It is present in more than 85 countries having manufacturing facilities across the world. Presently the stock is available @190, giving a market cap of 12K crores. There is negligible debt in parent listed company books, however on consolidated basis the company has debt around 2200 crores.

The company business is divided into three parts. The first is power system where company manufactures transformers and switchgears. It also have service elements like maintenance, diagnostics, system, turnkey services etc. The second part is industrial systems where company manufactures motors, generators, traction machines etc. The third vertical is consumers where company manufactures fans, lights, domestic pumps, appliances, power solutions, security system, coolers etc. Recently the company decided to demerge its consumer business into separate entity and this demerger can be expected to take place in next few quarters.

The company has a powerful consumer business and the brand is a household name in India. It is market leader in fans and pumps. In lighting it is one of three largest player. Appliance business is relatively small where last year it garnered a turnover of 180 crores. The size of consumer business is around 2800 crores growing at a healthy pace with EBIDTA of 330 crores. This demerged entity shall be a focused player on consumer segment and ought to be valued around 6000 crore on a conservative basis. Nearest competitor is valued around three times sales, and 35 times earning. We are giving it a conservative valuation of 2 times sales. Generally after demerger some operation efficiency and focus is gained which is good for the consumer business going forward.

The left over sales is more than 10000 crores on consolidated basis. There appears to be turnaround in power business and EBIDTA has improved to 14% in Indian operations. ROCE of power business has improved to 30% which is better among the pears. Industrial verticals is still in degrowth phase but likely to improve with turnaround in manufacturing sector. If we see the size, margin, ROCE of this business it is equivalent to peers. All the pears are valued at multiple of sales. Even if we give it a price to sales multiple of 1, it ought to be valued around 10K crores.

Thus demerger is likely to unlock value of around 4000 crore, i.e. 33%.

After demerger, the consumer business is likely to be more focused, consumer centric and operationally efficient. It can create a investment opportunity in the demerged business on its own, if the demerged entity is listed a steep discount.

The power and industrial business is showing signs of turnaround. Company recent foray into automation to promote smarter grids for increased energy efficiency is showing tremendous growth and management is very hopeful in this segment. The company is consciously trying to go up the value chain, and lately its critical products have been approved by Power Grid. Research activity is also going on well and they were granted two patents last year. On the whole appears to be a turnaround as 2014 EBIDTA has been manifold of earlier year. With expectation of revival in manufacturing sector, the company is likely to do well in future.

Some corporate governance issues are there. A couple of years back the Managing Director purchased an aircraft attracting severe criticism. Later he sold all his holding when left the MD post. But I think this is a thing of the past. Company has rewarded shareholders with generous dividends and last year a decent buy back of shares was also made. However, I request value pickers to share any corporate governance issue related to the company.

With these, I think the stock is worth a look for conservative investment.

Right Now, MCap is 12K crore and Sales stand at 14K Crore.

Ratio of MCap and Sales = 12/14 = 0.857

Consumer division has 2800 Cr. sales and we are giving it say Valuation of 2 price/sales

So, Value Unlocking = 2800(2 - 0.857) =3200Cr

Percentage of unlocking = 3200/14000 * 100 = 22.8%

Oops, mistake -

Percentage of value unlocking should be 3200/12000*100 = 26.67%

=3200Cr

Rajesh,

Good analysis above 4K on 12 K in three to four months could be excellent return

Counter point - 1

Crompton Greaves demerger formula unfair to investors -

http://www.business-standard.com/article/companies/crompton-greaves-demerger-formula-hurting-minority-shareholders-114102100868_1.html

Counter point - 2

Some back of envelope calculation in this article - http://articles.economictimes.indiatimes.com/2014-10-24/news/55398040_1_consumer-business-crompton-greaves-fair-value

"

Though prima facie, the demerger ratio appears as neutral for existing shareholders of Crompton Greaves, a closer look reveals that it prohibits full unlocking of value for shareholders. Consider this: The fair value of Crompton Greaves is computed by adding the value of its power and industrial business along with the value of its demerged consumer business. Its power and industrial business is valued by analysts at nearly Rs 6,000 crore, while its consumer business is valued at nearly Rs 7,000 crore in the FY17 earnings projection.

Thus, simplistically, we arrive at a figure of Rs 13,000 crore, or Rs 207 per share (stock trading at Rs 188.10 as of October 23 closing). This would’ve been the value, had the consumer entity been demerged fully. Since the demerger is to the extent of 75 per cent, investors will begin ascribing a 15-25 per cent holding company discount to the value of its consumer business. Assuming a 20 per cent holding discount, the consumer business would be valued at Rs 5,600 crore and the total value of Crompton Greaves will drop to Rs 11,600 crore, or Rs 185 per share. In a post-earnings conference call, Crompton Greaves CEO & MD Laurent Demortier explained the rationale of going for a 3:4 demerger ratio, rather than a 100 per cent demerger"

Finally I think that buy and sell call would be largely driven by value of remainder of business

CG cosumer business is likely to be valued ~6500 Cr is general consensus

How are some of the peers valued ?

Yep, CG would hold 25% equity in CCPL as a holding company -

http://www.cgglobal.com/pdfs/Demerger-CP/Consumer-Demerger19Oct14.pdf

Salient features of the Scheme -

1). The Consumer Products Business undertaking shall be de-merged into CGâs wholly ownedsubsidiary, CCPL.

2). Under the Scheme, CG will transfer its Consumer Products Business undertaking including relatedbusinesses, undertakings, properties, investments, intangibles, contracts (including employeecontracts) and liabilities into CCPL.

3). CCPL will issue and allot to the shareholders of CG as on the record date 3 (three) fully paid upequity shares of Rs. 2 each for every 4 (four) equity shares held in CG.

4). CCPL will apply for listing its shares on the BSE and NSE.

**5). Upon demerger, CG will hold 25% + 1 share in CCPL and the balance will be held directly by the****shareholders of CG. **CG will benefit from the growth potential of the Consumer Products Businessand its ability to create additional value for shareholders as an independent company.

6). The proposed Scheme of Arrangement will be subject to the approvals of the High Court ofJudicature at Mumbai. The restructuring will further be subject to various statutory approvals,including those from the shareholders, lenders and creditors of CG and CCPL.

7). Appointed date of the scheme will be 1st April 2015.

Crompton was in news in past due to corporate governance issue as pointed out by Rakesh.

Also it would have been better if they would have gone for full demerger.

The reason given by CEO for 75% de-merger doesn’t make any sense at all.

“The company has put enormous efforts to build the consumer business to reach scale and size over long time, we have kept stake to continue to reap the benefits of our efforts.” ???

sounds like non-sense to me

Even if you go for 100% demerger, the SAME shareholders will be holding the shares of the demerged company and the original promoters and shareholders will continue to reap the benefits.

The only reason i can think of is , that this will give existing Promoters greater control over the demerged entity.

If it was 100% demerger - promoter stake will be abt 42 %

for 75% demerger - promoter control - 25% through Parent company + abt 32% = 57 %.

So if the demerged entity gets a better valuation, it will be easier for Promoters to raise funds thru equity dilution or sell their own stake at better valuation and still maintain control over the company.

All this may not happen but looks possible to me.

Also Havells which is a much better brand and company with much better ratios is quoting at abt 2 times sales.

And Bajaj Electricals is quoting at 0.6 times sales.

I dont understand why Crompton should be valued at more than 1 times sales.

We are betting on the turnaround but same cant be taken for granted and cannot be accounted in valuation - Margin of safety ?

Anyways without turnaround even 1 times sales seems on the higher side.

Crompton was in news in past due to corporate governance issue as pointed out by Rakesh.

Also it would have been better if they would have gone for full demerger.

The reason given by CEO for 75% de-merger doesn’t make any sense at all.

“The company has put enormous efforts to build the consumer business to reach scale and size over long time, we have kept stake to continue to reap the benefits of our efforts.” ???

sounds like non-sense to me

Even if you go for 100% demerger, the SAME shareholders will be holding the shares of the demerged company and the original promoters and shareholders will continue to reap the benefits.

The only reason i can think of is , that this will give existing Promoters greater control over the demerged entity.

If it was 100% demerger - promoter stake will be abt 42 %

for 75% demerger - promoter control - 25% through Parent company + abt 32% = 57 %.

So if the demerged entity gets a better valuation, it will be easier for Promoters to raise funds thru equity dilution or sell their own stake at better valuation and still maintain control over the company.

All this may not happen but looks possible to me.

Also Havells which is a much better brand and company with much better ratios is quoting at abt 2 times sales.

And Bajaj Electricals is quoting at 0.6 times sales.

I dont understand why Crompton should be valued at more than 1 times sales.

We are betting on the turnaround but same cant be taken for granted and cannot be accounted in valuation - Margin of safety ?

Anyways without turnaround even 1 times sales seems on the higher side.

Excellent inputs. I think the market has some negative perception about corporate governance of CG, and may be for that reason it is priced where it is priced.

One way of investment can be to wait for demerger and buy the demerged entity if it list at some discount to the estimated fair value. It happens frequently and Joel Greenbalt emphasized investing in spin offs in his book- You Can be a Stock Market Genius. Recently two spin offs have given excellent result- Marico Kaya Enterprises & Gulf Oil Lubricants.

Taking a position before demerger needs belief on turning around of Power business of CG. On top of it it needs conviction in the honesty of management.

Update on ET about Crompton demerger

http://economictimes.indiatimes.com/industry/cons-products/electronics/advent-temasek-to-buy-cromptons-consumer-electric-business-for-rs-6600-cr/articleshow/47014377.cms

I hold CG already, Can someone help me understand what will happen to my existing stocks?Suppose I have 100 C.G , so I will get 100 Shares of consumer business valued at about 94 Rs and 100 Shares of remaining business (Power etc.) may be valued at may be 0.7 to 1 time sales(7000-10000cr)…Does it work like this?

Anindya

Co represented by Laurent Demortier, MD & CEO.Key takeaways by Capital Mkt
Order Inflow & Order Book Break-up
Segment Order Book Order Intake
India Non-India CG Global total India Non-India CG Global total
Power Sytems 3161 4100 7261 716 1278 1994
Industrial 512 132 644 427 85 512
Total 3673 4232 7905 1143 1363 2506
Figures in Rs crore
Standalone power systems business lost revenue to the tune of Rs 200 crore in Q1FY16 on account of strike at Nashik Factory, delay in delivery of an export order and product mix change. And that has hurt the profitability of standalone power systems business and pushed it into red at PBIT level. The revenue loss on account of Nashik factor strike is about Rs 60 crore, delay in export order due to client side issues is Rs 75 crore and product mix is Rs 50-55 crore. Unlike Q1FY15 when the company produced 765 kv transformers, it has engaged in production of lower rating transformers in Q1FY16 and this has lowered the revenue for the quarter. Apart from this there is not one off provisioning in Q1FY16 that hurt the profitability of standalone power systems.No production in Nashik Plant for almost 2 weeks in Q1FY15 but the situation has improved and the impact will be not be that much in Q2FY16 as the productivity is at about 85% so far in current quarter.
India Power systems business will turn profitable from Q2FY16 onwards as the impact of production disturbance in current quarter will not be that much of Q1FY16 and change in product mix in favour of higher rating products. The company bagged significant lower rating product order anticipating dip in production in Q1FY16 and with burnout of 765 kv order book commence the profitability will improve.
India export order book as end of June 2015 was Rs 898 crore and the order inflow in Q1FY16 was Rs 179 crore. The export sales in Q1FY16 was Rs 133 crore.
In international business as the company announced divestment the order inflow slowed down as the utilities are playing wait and watch game as they want to know the new owners capability/commitment. So the international business is strained by volume de-growth.The company expects to close the international power systems business divestment by year end. So the company hopes the continuing international business to come back on track by end of the year.Going forward the company will try to minimize the impact due to divestment of international power business.

Co was repr by Laurent Demortier, CEO & MD.Highlights of call by Capital Mkt
Consolidated order backlog as end of Sep 2015 was Rs 8428 crore with order intake for the quarter being Rs 2886 crore.
Order intake in Q2FY16
India Non India CG global
Power Systems 714 1636 2350
Industrial 452 84 536
Total 1166 1720 2886
Order Backlog as end of Sep 2015
India Non India CG global
Power Systems 3145 4607 7752
Industrial 553 123 676
Total 3698 4730 8428
Figures in Rs Crore
The company is in the process of monetizing its investment in non strategic business as well as assets. In this regard on Oct 8, 2015, the BoD have approved divestment of its entire 50% stake (investment of 600000 equity shares of RS 10 each) in medium voltage business i.e. CG Lucy Switchgear (CG-Lucy)to W Lucy & Co of UK for a consideration of Euro 5.50 million. Similarly the company with effect from Aug 12, 2015, has terminated the Distribution Franchisee Agreement (DFA) with MSEDCL for Jalgaon Circle Area.
On Oct 16, 2015, the BoD have also approved entering into definitive agreement for the sale of a portion of its land in Kanjurmarg, Mumbai admeasuring approx 53000 sft for an aggregate sum of Rs 496.48 crore.
International power systems (IPS) business continues to be impacted by ongoing divestment process. The buyer has completed due diligence of of all plants and expects definite offer by end of Dec 2015.
Automation orders backlog as end of Sep 2015 was Rs 831 crore with order intake in Q2FY16 being Rs 441 crore. Revenue from Automation in Q2FY16 was Rs 197 crore, which is flat compared to corresponding previous period.
Proceeds from monetization of non core business/assets will be used to reduce debt at international operations.
Lower EBIT for consumer business in Q2FY16 is largely due to the company accounting an amount of Rs 15 crore towards certain cost heads which was hitherto accounted under unallocated under consumer biz.
Exports revenue in Q2FY16 was Rs 329 crore which is higher compared to Rs 317 crore in Q2FY15 and Rs 133 crore in Q1FY16. Exports order backlog is Rs 883 crore.
Kanjurmarg – Out of 34 acres the company initially sold 8 acres and now has sold another 13 acres. Nothing more will be sold in the next 12-18 months.
Two quarters from now the high rating transformer orders will start contributing to topline and that will improve the India power system margins from FY17 onwards.

CONFERENCE CALL

Crompton Greaves

Order book stand at Rs 7954 crore

Crompton Greaves held a conference call on Feb 2, 2016. In the conference call the company was represented by Laurent Demortier, CEO & Managing Director, K N Neelkant, CEO & MD in waiting and Madhav Acharya, CFO.

Key takeaways of the conference call

Divestment of International Power systems business – Today received the binding offer from the potential buyer with whom the company is in exclusive negotiation. The board of CGL felt the offer made is not acceptable in its current form and rejected it. The offer comes with some conditions and that is not acceptable to the CGL. The company is open if the offer is modified by the potential buyer.

The provision of Rs 410 crore is on account of divestment of Canadian subsidiary. The divestment needed impairment of investment and advances and that was provided for in Q3FY16. Continuation of impairment provision going forward largely depends on the annual review.

Lower profitability for the quarter is largely due to lower sales. Lower sales of India power business is largely due to customer schedule as exports out of India grew by 53% to Rs 251 crore. In non India business while the SEA and Indonesia have performed well, the sales in Europe, Middle East Asia and Africa dipped.

Order intake for power products in corresponding previous period was Rs 655 crore and it is now down to Rs 565 crore in Q3FY16.

Indian power business currently has a healthy order book and that gives strong revenue visibility. The India focus and divestment of overseas power business is also largely to maximize operational efficiency. Higher sale and improved operational efficiency will naturally result in improved profitability.

Outstanding loans and advances to subsidiaries is Rs 1600 crore as end of Dec 2015.

i strongly feel that the core biz of crompton greaves is highly undervalued at this price point

as of 31/12/2015 as per the management in the ConCall, CG is having net debt of only Rs 900 VS Rs 2200 crore 18 months back.

its exit from the canadian ops wud reduce the loss significantly and post the exit from the power biz in europe wud make in highly profitable company

Is anyone still tracking this? The company is taking drastic measures to cut down its debt and has reduced it from 2200 cr to 900 cr in a year(net debt). It is expected to become a debt free company after the sale of its international loss making business to First Reserve in 1HFY17. This will improve the EBITDA margins to 7-8 % and the company will reinvest its earnings into its domestic T&D and industrials business. The management has guided FY 18 revenue of 7200 cr in 2018 (earlier had given guidance of 6500 cr). Irrespective of the guidance, this company seems to be deleveraging quickly and looks undervalued compared to its peers like Siemens, Alstom and ABB. Anyone in the T&D business here who can throw some light on the products vis a vis its competitors?

CONFERENCE CALL - from Capital Markets

Crompton Greaves Consumer Electricals

LEB bulbs and premium fans showing good growth

Crompton Greaves Consumer Electricals held conference call to discuss its results for the quarter ended March 2016.

Highlights of the meet

  • For quarter, the net sales has increased by 11% to 1002 crore. The operating profit before corporate and one time expenses has increased by 21% to Rs 147.2 crore. OPM has improved from 13.4% to 14.7% YoY. The net profit stood at Rs 66.6 crore.

  • The mgmt said that focus is to drive its core business and make sure its core is strong, healthy & growing.

  • For Q4, lightening business up by 7% and consumer electrical up by 12%.

  • Fan continues to grow mkt share. Premium fan sales for Q4 were 54% growth and 35% for 6M period. The mgmt focus it to drive premium segment of fan harder and it is seeing good sign. Premium fan contributes to 10% of fans sales. There is lot of opportunity in premium fan.

  • Fan has seen price hike of 1-2%.

  • Pump and fans growth is ahead of market growth. Lot of the company’s growth is due to focus on premium fan.

  • Decline in CFL and tradition bulb in volume and value hampering lightening business growth. As result, lightening business has seen fall in its margin also. Growth is happening in LED bulbs. LED bulb has shown significant growth, grown by 129% in Q4 and 280% for 6M.

  • Q4 contribution from EELS order was 9%, amounted to Rs 27 crore, a growth of 50%. Don’t see this program as margin dilutive by the company.

  • LED technology is changing every 6 month.

  • The company will continue to drive cost initiatives. Saving will be sued to invest behind stated strategic choices like building brand equity, innovation and driving GO to Market program.

  • The company is leader in residential pumps and driving focus on agriculture and specialty pumps.

  • The company will increase distribution and also improve in-shop presence. It will take time, but commence project.

  • The mgmt said that there are two areas where it can get continue growth is LED lights and consumer appliances. The company’s goal is to become strong 2nd or 3rd player in consumer appliances.

  • Gross debt is at Rs 640 crore and will look at reducing the same from internal accruals

  • The company have plans to refinance the debt with issuance of bonds thereby reducing interest outflow, would like to have good dividend payout

  • Capex will not be very high. Capex to be in the range of Rs 30-40 crore largely funded by internal accruals.

Cg ppl wants to separate their ele. Equipment bussi (fan etc) & they have pledged 65% shares of their main bussi. What does it mean?
Kill outdated generation bussi & run the profitable bussi with new name !

http://www.thehindubusinessline.com/companies/cromption-greaves-growth/article9593109.ece

KOLKATA, MARCH 20:
Electrical appliances major Crompton Greaves Consumer Electricals Ltd is hoping to close the fiscal with double-digit topline growth, even as it aims to boost brand recall amongst the younger generation.

Crompton Greaves Consumer Electricals products are now branded as ‘Crompton’.

Till April-December 2016 (the first nine months of this fiscal), the topline growth had been 12 per cent. The company reported a turnover of ₹2,900 crore and a profit after tax of ₹204 crore during this period.

According to Matthew Job, CEO, the company is expecting some impact of demonetisation in the ongoing January- March quarter (Q4 on this fiscal) and a “probable spill-over” in Q1 (April to May) of FY18. “We feel that despite demonetisation, our overall growth this fiscal is likely to be in double digits,” he said here on Monday adding that the company was targeting to grow faster than the market.

Crompton Greaves Consumer Electricals operates primarily in four verticals that include fans – where it has a leadership with 25 per cent market share; lighting; pumps (it has another 25 per cent market share in residential pumps category and a 7-8 per cent in agricultural pumps); and small appliances. Fans contribute close to 40 per cent of its turnover and lighting forms another 30 per cent. Pumps and small appliances account for 20 per cent and 10 per cent, respectively.

Targeting youngsters
According to Job, the new management has decided to invest around 2-3 per cent of the turnover towards brand building and is looking to reach out to the younger generation.

The company, he maintained, had high recall value amongst the older generation compared to the youth. Hence, a conscious decision has been taken on the branding front.

“In the past, the company did not invest in the brand. Now we are targeting nearly 2-3 per cent of our turnover towards marketing spends and in building the brand,” he said adding that Crompton was also in the process of getting a five-year blueprint ready.”

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Apologise for reviving this very old business thread.
I have started looking into this business and noticed bank and cash balances have increased from average 50-150 cr range to ~600cr range. Can already invested/tracking people shed some light on it whether management have discussed something about it.

Update: From last few earning calls, cash balances are now at 1300cr. Mgmt didn’t provide any sort of clarity with the intended purposes but maintained that these are the “healthy” levels. Hopefully, they have more acquisitions planned.
Disc: Observing but

  1. This huge pile of cash is the only thing acting as the deterrent.
  2. This also feels too unsettling.

Mr. Khosla is entitled to exercise the options mentioned above during the financial years 2021-22 to 2030-31. If Mr. Khosla exercises all or part of the options which he is entitled to exercise, during any one or more of the next three financial years, the total managerial remuneration payable by the Company to Mr. Khosla as Managing Director may exceed 5% of the net profits of the Company for that financial year(s). Further, if Mr. Khosla (Managing Director) and Mr. Job (Executive Director and Chief Executive Officer) exercise all or some of their respective stock options, the remuneration payable to either the Managing Director or the Executive Director & Chief Executive Officer individually, including the perquisite value of such exercised options, and the remuneration collectively payable to Managing Director and Executive Director and Chief Executive Officer may exceed 10% of the net profits of the Company for that financial year(s). The Company therefore seeks shareholders’ approval by means of a special resolution to enable the Company to pay such managerial remuneration, pursuant to provisions of section 197 of the Companies Act, 2013.

Finally decided to not invest as new acquisition is margin diluting, paid very high valuations and it’s cash flows also look cyclical in nature(also).

This was the reason for accumulating cash afaik.this was also hinted at in the last conference.