Following Thapars’ stake sale in the consumer products business, the group’s cash cow, to Advent and Temasek, there are concerns around performance
At a time when its power and industrial systems operations were a drag on the company, the announcement by Thapar group-owned Crompton Greaves last year to de-merge its flagship consumer products space was seen as precursor to the promoter exiting the cash-flow generating business. With private equity players Advent and Temasek buying a 34.8% stake in the de-merged entity — Crompton Greaves Consumer Electricals (CGCEL) — from the Thapars, this premise has played out.
The deal, announced late April this year, will result in the creation of two companies, each with its own own set of challenges. In late April, Crompton said the promoters had sold their entire stake in the consumer business to a special purpose vehicle (SPV) of Advent international and Temasek for R2,000 crore. The acquirers are likely to increase their stake via a mandatory open offer, once it is listed on stock exchanges.
Thapars’ decision to exit their flagship consumer business, which draws higher profit margins, has come as a surprise to many, especially given its brand value. Analysts wondered why the promoters and Crompton Greaves needed to make a complete exit from the consumer entity, given it was the best-performing piece.
Indeed, Crompton’s consumer business is the group’s cash cow and contributed close to half the operating income in 2013-14. The track record speaks for itself — it’s the only business that has done well consistently in the last five financial years. In contrast, the industrial and power system businesses put up a poor show reporting a compounded 10% and 18% contraction in profits before interest and tax (PBIT) since FY09.
Indeed, there are concerns that financial investors might not be able to come up with the kind of strategies a consumer business calls for, although it enjoys a strong brand recall; in the fans market for instance, Crompton is the market leader with a share of over 25%.
The concerns may be somewhat overdone, however, since there are examples, both at home and abroad, of companies that have financial investors as the main shareholders, being well-run. Sanjeev Krishnan, Leader-PE, PwC India, believes that even if the ownership changes, if the management stays, PE players can supplement their efforts with new appointees. “Advent has a number of operating partners globally who can be mentors,” Krishnan observes. In fact, it might not be so bad that PE players are the majority owners because they will be looking to create good value in the future.
Advent International is confident Crompton’s consumer business will thrive. Managing director in India, Shweta Jalan, says that once the transaction is complete, it hopes to drive growth by investing in sales, marketing and distribution and also bettering the product. It’s likely the CG brand will stay and given the consumer arm already enjoys a strong distribution channel — a network of 4,000 distributors — it can leverage the strength of the brands in the lighting and fan segments. While rival Havells boasts a more diversified product portfolio with a strong presence in switches, switch gears and even kitchenware, it might be able to introduce these, say market experts.
For the Thapars, the bigger task will be to pull up the power and industrial systems piece — seven of its 11 key wholly-owned subsidiaries across Europe, the UK, Brazil, Canada and the UAE reported losses in FY14. Although its subsidiaries in Belgium and the Netherlands turned profitable, many are in trouble—in the December quarter, the management said the Canadian and Hungarian subsidiaries reported quarterly losses of $1.6 million and $4 million, respectively.
The home market isn’t proving to be any easier to operate in, with key customers such as State Electricity Boards (SEB) not having the financial wherewithal to buy more. Crompton’s orderbook hasn’t exactly been overflowing although it is bidding more for orders from PowerGrid. At the end of December 2014, Crompton’s power system segment had an orderbook of R7,956 crore; the total orderbook stood at R8,666 crore with the backlog from both India and non-India based business declining 14% y-o-y. Turning around businesses isn’t new to Gautam Thapar; he did it first with the ailing Andhra Pradesh Rayons. And since he became chairman of the company in 2004, he has seen both good and bad times. Turning around Crompton, however, could turn out to be a tall order.