Edelweiss lowers Crompton Greaves target price to Rs 62

By: | Published: December 10, 2016 6:36 AM

Recent termination of Crompton Greaves’ (CRG) share purchase agreement (SPA) for overseas power equipment plants implies sustained losses till piecemeal sale is concluded and hence will remain a key overhang.

However, consolidated numbers will remain subdued impacted by exit costs and high interest burden. (CG Website)However, consolidated numbers will remain subdued impacted by exit costs and high interest burden. (CG Website)

Recent termination of Crompton Greaves’ (CRG) share purchase agreement (SPA) for overseas power equipment plants implies sustained losses till piecemeal sale is concluded and hence will remain a key overhang. We appreciate Crompton Greaves’ (CRG) strategy of focusing on domestic businesses, which will drive a reasonable 18% standalone earnings growth (CAGR FY16-18E).

However, consolidated numbers will remain subdued impacted by exit costs and high interest burden.

We trim FY17/18E consolidated EPS by 34/48% building in impact of sale deferment of loss making assets, which implies a revised TP of R62(vs R77 earlier), valuing standalone business at 12x PE on FY18E earnings. Key monitorables are performance of industrial business and clarity on domestic power bizz.

CRG is on track to conclude sale of its automation business (ZIV portfolio) by January 2017 for EUR120m (EV), which will be used to repay debt. However, overseas power plants will now be sold on case-to-case basis (bouquet basis earlier), which will imply a much lower value versus earlier with a much longer exit time frame.

While management may retain profitable Indonesian/US plants, it is clear about exiting Hungarian/Belgian plants given limited turnaround avenues. Given plant-by-plant exit strategy, we envisage it to take a few quarters, denting FY17/18 profitability.

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