For this year's letter I would like to start with a bit of history. Your Company was aleading India-based player in transformers switchgears motors fans lights and otherelectrical consumer products in 2005 when it made its first international acquisition ofthe Belgium based Pauwels Group. It gave CG additional manufacturing facilities for powerand distribution transformers in Belgium Ireland Canada the USA and Indonesia.
This was followed by a series of other acquisitions: ofGanz'transformer and rotatingmachine facilities in Hungary in 2006; of a series of automation businesses in Irelandthe USA the UK and of ZIV in Spain; of power systems and solutions businesses in the USAand the UK; of drives and automation in India and Sweden; and some other operationsinvolving services. The rationale for such acquisitions were two-fold: first to give CG astrong presence in markets abroad; and second to integrate these enterprises in a mannersuch that your Company became a full solutions provider' to customers across theworld.
Thanks to soaring demand right up to FY2011 majority of these acquisitions earned goodprofits for your Company as a whole. In the first six years the gains to CG wereexcellent. The net present value of what your Company earned from these businessesexceeded the cost of acquisition.
Matters began to turn for the worse from FY2012 and the more so during the next fouryears leading up to FY2016. In large part it had to do with a tremendous slowdown indemand for electrical equipment and solutions throughout the developed nations. Moreoverbarring a few international facilities the effects of a demand downturn were exacerbatedby aflawed integration strategy in the power systems business.
For four consecutive years actions were taken to correct the execution strategy. Amongothers these involved substantial new investments in setting up modern plant andequipment calibrated rationalisation of the work force and exploring new markets. None ofthese worked sufficiently enough to turnaround most of the businesses from making lossesto earning sustained profits. It became unsustainable.
Recognising this your Board of Directors decided that it was time for taking harddecisions. In summary these have involved:
a) Selling the power transformer business in Canada for an enterprise value of Canadian$20 million subject to post-closing adjustment. Operation of the entity has beentransferred to the buyer from 17 November 2015.
b) Closing down the power systems business in Brazil and starting the process ofwinding up its systems businesses in North America and the UK.
c) Entering into a binding agreement with First Reserve for the sale of itstransmission and distribution businesses in Indonesia Hungary Ireland France the USAand Belgium at an enterprise value of 115 million. First Reserve is a leading globalprivate equity and infrastructure investor exclusively focused on energy.
Your Board decided to exit some of the Company's Indian operations. If you willrecollect we had entered into a franchise agreement with the Maharashtra StateElectricity Distribution Company Limited (MSEDCL) from June 2011 for the distribution ofelectricity in the Jalgaon Circle Area and was managing this business since November2011. However Distribution Franchisee Agreement stood terminated w.e.f 12 August 2015upon MSEDCL exercising its step-in rights consequent to unresolved disputes.
The Company is confident of arriving at an amicable settlement with MSEDCL on allpending issues under the agreement.
The consumer products business became a separate independent corporate entity calledCrompton Greaves Consumer Electricals Limited with effect from 1 October 2015. This was aprofitable operation that generated significant free cash for your Company. Even so yourBoard of Directors and I believed that: (i) this B2C business sat uncertainly on the coreB2B operations involving power transformers and industrial systems and (ii) the aggregateshareholder value from the sum of two distinct companies CG and CGCEL wouldbe larger than that of the earlier whole. Since it is your Board's duty to focus onenlarging long term shareholder value it collectively decided on this course of action.
In addition your Company voluntarily adopted the Ind AS accounting standards a yearearlier than mandated. That has helped CG to create a leaner balance sheet and a moresustainable financial architecture for future growth as well as for the return on capitalemployed and the return on net worth.
There have been three significant senior managerial changes. Laurent Demortier yourCompany's CEO and Managing Director from 2011 has demitted office. K N Neelkant anexperienced CG hand has taken over as the new CEO Managing Director and an Executivemember of the Board and Madhav Acharya the CFO has been elevated to the Board as anExecutive Director with independent charge of all finance functions.
To summarise CG now has new leadership.
It is less cluttered more manageable and most importantly a more profitableenterprise without the burden of losses of most of its internationally locatedbusinesses. With India's GDP looking to grow at least at 7.6% in FY2017 as it hasin FY2016 we expect the demand for power equipment rotating machines drives andrailway traction equipment to increase at the expected rates I expect a better future inFY2017 and beyond.
As always thank you for your support.