We upgrade Crompton Greaves (CG) shares to Buy from Neutral on the back of three potential triggers ahead: (i) demerger and separate listing of Crompton Greaves Consumer Electricals (CGCEL) leading to value unlocking in the consumer business; (ii) likelihood of 26% open offer in CGCEL by private equity acquirers post-listing; and (iii) potential sale of majority of loss-making international business in the near future in line with the stated intentions of management in the Q4FY15 results.
Target price increased 21% to R222: We change our valuation methodology to sum-of-the-parts, from P/E (price-to-earnings) on consolidated EPS (earnings per share). This is necessitated by (i) potential sale of majority of loss-making international business and (ii) loss-making international business deflating consolidated EPS and fair value of CG.
Estimates revisions: We cut our FY16e/17e EPS estimates by 51%/48% to factor in the latest trends from FY15 results and 0% Ebitda margins over the next three years in international business vs significant improvement earlier. Our estimates are 51-55% below consensus estimates over FY16e-18e. We believe near-term numbers are less relevant given they will be deflated by international losses.
Sale of international business should re-rate CG: International business contributed a loss of R5.2 bn (including R1.9 bn of write-offs) in FY15. A sale (along with the liabilities of the business) of a major portion of the international business could re-rate the remaining B2B business of CG.
Demerger and sales of consumer business: Though the sale value of consumer business to PE investors was below market expectations, the separate listing of CGCEL could enhance minority investors’ equity value in CG as (i) the market might accord a higher multiple to the business once it is separated from CG and (ii) there is a possibility of triggering of 26% open offer by private-equity investors.
EPS revise downwards: We cut our FY16e-17e EPS estimates by 48-51% to factor in the latest trends from FY15 results.
* Our estimates are 51-55% below consensus estimates over FY16e-18e.
* In Q2FY15, CG’s board approved the sale of an 8-acre land parcel at Kanjurmarg for Rs 3 bn to Evie Real Estate. Post-tax profit booked on this deal was Rs 2.7 bn.
* Kanjurmarg has 22 acres more of land which could get monetised over the medium term post-shifting of warehouses and other facilities there.