CG Power: Investors should keep an eye on progress in deal completion

A strong partner should help business growth; further gains hinge on pricing, deal completion

The news of Tube Investments of India (TII) acquiring a controlling stake in CG Power boosted sentiment. CG Power has gained 30 per cent, while TII shares are up over 16 per cent since the announcement, with the Street viewing it as a win-win deal. CG Power gets a stronger parent, while TII gets a larger business and growth opportunity, albeit with its share of risk.

CG Power, which provides power and industrial system-related services, has struggled largely with stress in its European operations.

While the company restructured and divested part of its European business, it was not able to find suitable buyers for its Belgium and a few other assets. FY20 saw Belgium subsidiaries being referred to the country’s bankruptcy court. The financial stress, corporate governance issues, and alleged financial fraud in the India business had led to a 90 per cent erosion in its market cap since January 2018 highs.

TII now planning to back CG Power by acquiring majority stake is a positive development to revive Street confidence, said Ambreesh Baliga, a market expert.

 

 

TII will invest Rs 700 crore for a 57 per cent stake — Rs 550 crore to acquire 51 per cent and Rs 150 crore in warrants convertible into equity in 18 months. These funds and TII’s support augur well for CG Power.

Harshit Kapadia at Elara Capital said prospects of CG Power’s India and Indonesia business remain decent. It has been doing well in the transmission and distribution, and industrial motors, generators and other segments. Only the thermal power transformer segment is lagging, given limited thermal capacity additions. Thus, the acquisition will be positive for the engineering segment of TII, which is less leveraged and can raise debt for the takeover.
 

TII, which reported sales of Rs 4,750 crore in FY20, gets a business with FY20 revenue of Rs 5,158 crore. The payback time will depend on how quickly it turns around CG Power.

Baliga said Murugappa Group is very conservative and must have done due diligence before making a binding bid.

Kapadia, however, said he is watchful on TII handling the European stressed assets and other prerequisite clearances. Though TII may have discussed debt obligations with lenders before arriving at an offer price, how it deals with other creditors needs be seen. It may have to up the offer, if lenders have their way.

Investors need to be watchful of deal’s progress and its successful closure can lead to re-rating and some more gains for CG Power stock, said Deepak Jasani, head, retail research, HDFC Securities.