We retain our ‘buy’ rating on Crompton Greaves (CRG) on the back of the company's plan to de-merge its consumer durables business.
We value the standalone business at 18x FY16f EPS of R11.27 and international subsidiaries at nil to arrive at our target price of R203 per share. Our assigned multiple of 18x is in line with CRG’s average trading P/E since FY01. We also back up our target price with a DCF-based valuation target price of R188 a share.
We see this as a positive for the stock as it unlocks value; its consumer business could potentially trade at multiples similar to those of Havells India after the de-merger. We highlight the potential fair value of CRG’s consolidated entity on the basis that CRG’s consumer business gets valued at par with Havells India. We value Havells’ consumer business (consumer durable + lighting business) at 16.0x EV/Ebit multiple. Assigning a similar multiple to CRG’s consumer business, we arrive at an equity value of ~R5,650 crore for the business.
If we pencil in an equity value of R5,650 crore for the consumer business into our price target (equity value of consolidated entity), the implied EV/Ebitda multiple for other businesses (ex-consumer) works out to be 7.9x (based on FY16f estimates).
This EV/Ebitda multiple (for ex-consumer business) could get rerated to 10.0x after the demerger, in line with peers. Assuming this happens, our fair equity value of the consolidated entity would be R15,000 crore, which means a fair value of R238 a share.