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Crompton Greaves Cancels Sale of T&D Business


Crompton Greaves Limited (CGL) has cancelled the sale of its loss making T&D business to First Reserve. The sale would have gotten rid of the business and the big debt accompanying it.

The Deal

CGL in May 2015 has made proposals to sell of its power sector assets in Europe, North America and Indonesia, owing to increasing debt on their balance sheet and losses incurring from its foreign subsidiaries. The strategy was to align themselves to Indian economy and sell of the overweight foreign assets. A deal (known as Spear Deal) was struck with First Reserve, to sell of its Foreign power segment assets for Euro 115 Million (Rs 824 Crs) in May 2015.
Note: First Reserve is a global private equity and Infrastructure investor exclusively focused on energy
However the deal didn’t go through, as some CP (Conditions Precedent) were not fulfilled. First Reserve to establish banking lines for its CGLs Hungarian operations. CGL has been giving extensions to First Reserve to complete the process. But it took almost 9 months without much progress, Finally the deal has to be called off.
The second deal they have (which is still on) is to sell of their B2B automation business in Spain, UK, Ireland, France and India. The sale is pegged at Euro 120 million (Roughly Rs 860 Crs). The sale is expected to complete by 31st January 2017. The buyer is Alfenar Electrical Systems based in Saudi Arabia. Apart from the Euro 120 Million, CGL might receive any extra cash of Euro 5-7 Million (35 – 50 Crs) as part of the deal. This deal is still on, but again, since it hasn’t been completed, we have to wonder if that has a problem as well.

Why The Asset Sale?

Crompton Greaves has Transformer and Switchgear businesses in its power segment. They also have Rotating Machine business, which they intend to keep. Their operations are spread across five geographies mainly Indonesia, US, Ireland, Belgium and Hungary. The Indonesian business has been doing well, US and Ireland have been moderate. But Hungary and Belgium have been loss making.
CGL which specializes in manufacturing of large transformers had entered into manufacturing of small distribution transformers and application transformers, which were bogged with quality issues and eventually turning the whole segment into a loss making business.
To pay of the debt in the overseas business, CGL has been utilizing the debt from its Indian counterpart. CGL utilized Rs 150 Cr from its domestic business segment to pay off debts made by its foreign subsidiaries. The net debt increase in its standalone (domestic) balance sheet in H1FY17 stands at Rs 300 Crs.
CGL has incurred losses of Rs 200 Cr for FY16 for B2B automation systems business and Rs 20 Cr in H1FY17. As a whole, from the foreign operations the losses in discontinued operations stands at Rs 87 Crs for H1FY17.
The intention of the sale is to cut debt and reduce losses.

Change In Strategy

The initial strategy of the company was to sell the power segment as a whole. But the deal failing with the First Reserve, CGL has reconsidered the strategy. Now rather than going by segment sale, they are thinking to sell it off by geographical segment.
To do that first they need to remove the inter-dependency among each segment and make them a standalone operations. Though US and Ireland are pretty much independent, there is a problem with Hungary and Belgium. Though this is not impossible, it will require them to do it without incurring much losses in a fixed time frame.
The winding down of CGLs solution business based out of UK and US has provided the necessary confidence in the management to go ahead with its power segment.

Utilization Of Proceedings of The Sale of Business

The automation business has debt of around Euro 85 million, and the sale has been finalized for Euro 120 Million. Thus they will be getting a net of Euro 35 Million (Rs 250 Crs), to pay off its other debts. On top of this they will get an extra cash deal of roughly Euro 5 million to 7 million (35-50 Crs).
Currently CGL has 1832 Cr as debt (long term+Short term borrowings) on its balance sheet. With its sale of B2B automation business sale, the consolidated debt might come down roughly by 47%. (This is true even considering the failed sale of the US business).
CGLs foreign Automation business contributes 11% of the total consolidated revenue. The consolidated revenue as of Q2 FY17 stands at Rs 1495.48 Crs. However it has made losses to the tune of Rs 15 Crs in terms of PBIT  in Q2FY17.

Current Financial Position:

CGl has reported a revenue growth of 4.6% for Q2FY17 YoY. Profit has declined 46% YoY (excluding discontinued operations).
Order inflow for Indian operations is at Rs 2644 Crs for H1FY17, which is a growth of 15%. Out of Rs 2644 Crs, 1420 crs came from orders of Power systems and Rs 1220 Crs from industrial systems. Total order book of India currently stands at Rs 3541 Crs.
Crompton’s stock has fallen to Rs. 60, which is the lowest since March. The uncertainty of what they will do with the T&D business, and the continued losses hurt the sentiment on the stock.
Disclosure: No positions, and no recommendations on the stock.


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