With problems at its global operations persisting, Crompton Greaves Ltd (CGL) from the Avantha stable faces an uphill task as it sets about regaining its position in the market. The company has been a victim of the economic downturn in the global market and Gautam Thapar, chairman of the Avantha Group, had told shareholders as much when reviewing its FY14 performance. Thapar conceded that a turnaround in the immediate future would be difficult. He pointed out that while CGL’s industrial products business “faced headwinds” in FY14, the growth in its consumer products business has been slower than before.
“Some plants have continued to have problems such as the Canadian facility at Winnipeg” and “the distribution transformer business is also facing headwinds in terms of orders (due to) subdued economic activity in Europe”, Thapar said.
However, since then, several sources have indicated that the Thapars are looking for an exit strategy for its CG holdings.
The latest of all is a March 17 Financial Times (FT) report. “Crompton Greaves, a Bombay-listed electrical engineering company that is part of the Avantha Group, is close to reaching agreement to sell a 35 per cent stake in its consumer business to private equity firm Advent International for about $300 m (about R1860 crore), according to two people familiar with the situation… Part of the capital
Advent plans to put into the consumer side of Crompton Greaves will go to repay about $250 million of expensive junior debt owned by Apollo (Global Management) and KKR at the holding company level,” the FT reported.
Though an official confirmation on the development is still awaited, Barclays believes the pre-demerger sale to any investor at a discount to its fair value (of R100-120 range) would not represent long term valuations. “We believe that a re-focus on the consumer business post demerger can create value given its strong brand and reach,” a report noted.
CGL’s international business constitutes 51% of its overall revenues. Several hurdles like quality issues with orders delivered, order execution delays, liquidated damages on account of orders the company had to give up while shifting operations, and the need to rework certain orders have taken a toll on the financial performance of the company.
Laurent Demortier, CGL’s CEO and MD, told investors recently the management was not happy with the firm’s performance, especially in India. However, the CGL chief said it had not come as much of a surprise. According to Demortier, a weak currency hit CGL’s profitability since more than 70% of turnover from its power business is transacted in euros.
Demortier told investors that orders worth another 20 million euros (around R140 crore) that had to be potentially reworked were still to be executed.
However, brokerage firm Nomura points out that CGL’s European operations were “facing quality issues” and although Crompton had restructured its European operations, its North American operations were still making losses. On February 3, Demortier accepted the fact that CGL’s Canadian facility had incurred US$1.6 million Ebitda (earnings before interest, tax, depreciation and amortisation)-level losses in FY15.
“We are concerned about whether CGR (CGL) has been taking up orders beyond its technical capabilities in a bid to fill up factories…although over the past 12 quarters management has repeatedly stated that its factories were full and thus ‘it had the luxury of choosing orders’, CRG (CGL) has still been reporting losses at its international subsidiaries”, a Nomura analyst wrote, adding that even after repeated assurance by the management, CGR “has still been reporting losses at its international subsidiaries”.
Crompton Greaves’ management did not respond to several requests for a meeting.
CGL’s operating profit margins reflect the problems; Ebitda margins fell to 6% in FY14 from 15% in FY10. And according to Nomura, its international business may not recover soon. The only silver lining to the company’s otherwise bleak performance is its domestic business, comprising mainly consumer electricals and appliances, which continues to grow.
However, CGL is set to spin off and de-merge this business that accounts for around 49% of turnover, proceedings for which are underway; the company told the BSE on March 3. The new entity that will house the consumer products business will be called Crompton Greaves Consumer Electricals Ltd (CGCEL), effective October 1, 2015. “The demerger will achieve the stated group objective of creation of two industry leading independent entities and unlocking shareholder value” which will help it in “pursuing aggressive growth going forward”, Demortier informed the BSE.
HSBC Securities said that the separation of the two businesses will allow the management to focus on the consumer division, which can then grow faster and capitalise on a brand that has strong customer recall. “While its international power products business floundered (losses in FY11-14)…the demerger in our view will allow the consumer business to expand faster as it is able to reward and retain talent through better wage growth relative to its power products business,” an HSBC analyst said. Although the growth in new orders in the past two years has been flat resulting in very little pick-up in operating leverage, “Systems and automation orders now comprise around 40% of its current international order backlog, which suggest that the company is looking to move away from its low-margin, traditional T&D (transmission and distribution) products”, he said.
With the acquired smart grid automation company ZIV Group, Thapar is looking forward to a turnaround for his power and industrial systems businesses. “The right suite of automation products will allow CG to offer various types of smart interfaces in electro-mechanical products and systems, and go a long way in the evolution of intelligent machines and smart grids. I expect much out of automation”, he said.