Crompton Greaves (CRG) reported disappointing 2QFY15 EBITDA – 13.5% below estimates. Power systems subsidiaries continue to disappoint, with management maintaining it should turn around. We remain negative on potential of a positive surprise in power systems, though potential sale of loss-making subsidiaries has given a floor to the stock. Subsidiary power systems remained EBIT negative at -1.8% v/s -0.8% in 2QFY16. We believe the segment will continue to disappoint as global pricing trends are not showing uptick signs. In 1HFY16, CRG sold their Canada operations for EV of $20 million.
The management mentioned that it is in definitive talks with a buyer to sell the remaining loss-making subsidiaries and hope to close a deal in foreseeable future. Apart from this possible positive event, fundamentally, we do not see any earnings surprise potential. We have reduced our FY16E-18E EPS by 11-55% to reflect the weak revenue and margins at the subsidiary level.
In April 2015, CRG’s promoters sold their 34.37% stake in CRG’s consumer business to PE investors for R2,000 crore (~16x PE FY17E). Proposed demerger and listing of the consumer business is expected by March 2016.
We believe if this segment does not see a sharp revenue recovery (8% YoY in 2Q), hopes of value creation through listing at a premium will also be dashed.