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| Crompton: Power-packed agenda |
| Shobhana Subramanian & Varun Sharma / Mumbai Mar 25, 2009, 00:08 IST |
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The investment in power generation, the Street believes, would limit the resources available for the core business.
The Crompton Greaves stock lost nearly 10 per cent of its value on Tuesday after it announced plans to pick up a 41 per cent stake in Avantha Power and Infrastructure (APIL), a promoter group company. In fact, the stock crashed 17.5 per cent from the day’s high of close to Rs 143, all the way to Rs 118 after the news broke.
 Analysts point out that while there is a undoubtedly good long term story in power, in the near term the cash on the company’s books may have been put to better use in the core business. Crompton says it will spend Rs 227 crore for the investment in Avantha Power, valuing the business at Rs 550 crore.
Even news of a buyback by the Rs 6,832 crore engineering firm, for an amount of Rs 224 crore, at a maximum price of Rs 170 per share, and an interim dividend of Rs 0.50 per share, failed to revive the stock meaningfully and it closed the session at Rs 122.15.
The company will probably use all the cash it has in hand ---estimated at around Rs 300 crore--- for the stake in Avantha Power, the buyback and also to pay out the interim dividend. The bill for all three is not small at Rs 470 crore.
Should the shares be bought back at current levels, it would amount to around 5 per cent of the company’s equity being purchased. At a slightly higher price of around Rs 150 per share, it would translate into 4 per cent of the firm’s equity. While not significant, the buy back should arrest the fall in the share price.
In the absence of details, it’s hard to tell how good the investment in Avantha Power is although there is no doubt potential in the power generation business given the huge shortfall in the country. Avantha Power has four captive thermal power plants located in Maharashtra, Haryana and Orissa with a total capacity of 95 MW.
There are plans to increase this capacity to165 MW by December 2009 and besides, the company is also planning to set up two IPP plants of 300 MW each in Madhya Pradesh and Chhatisgarh.
Crompton caters for the transmission and distribution space within the power sector and the European and American operations bring in around 40 per cent of the firm’s consolidated revenues. After posting a growth of 33 per cent in the top line for the first half of 2008-09, Crompton’s revenues grew at a far more subdued 25 per cent in the quarter ended December 2008.
The international business showed signs of slowing down, growing at 34 per cent during the December 2008 quarter, much below the 50 per cent growth seen in the first half of 2008-09. Had the rupee not depreciated the growth would have been even slower. According to a BNP Paribas, orders from the international market have been sluggish seeing an increase of just 5 per cent y-o-y (in constant currency terms) in the nine months to December 2008.
Crompton should manage to grow revenues by around about 25 per cent in the current year to around Rs 8,500 crore. However, the pace could slow down significantly next year to less than 20 per cent. That means earnings, which are tipped to grow at around 25 per cent in the current year, could see a more sedate rise of 15 per cent next year. At a price-earnings multiple of around 8 times 2009-10 earnings, most of the risks appear to be priced in.
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