Crompton: ZIV sale alone may not lift investor confidence

Sale proceeds of Rs 845 cr to help partly retire Rs 1,233 cr of international debt

Much on promised lines, Crompton Greaves concluded the sale of its international automation business, ZIV, on Tuesday. This pushed up Crompton's stock by almost three per cent to close at Rs 70.85, which is not surprising given the multiple benefits arising from the deal.

The sale of business to Saudi Arabia's Alfanar Electric LLC for 120 million euros (Rs 845 crore), would also help Crompton retire part of the debt of approximately 175 million euros (Rs 1,233 crore) 

pertaining to its international power business. As the proceeds are deployed towards retiring international power business' debt, the interest burden may significantly reduce at a consolidated level. 

Interest cost so far incurred in FY17 totals Rs 125 crore and analysts expect a reduction of at least 65 per cent hereon.

In December 2016, Crompton had said the sale of its international business had to be called off. The deal, which was at an advanced stage but not fructifying, had left investors worried as the business was on the block for a very long time. 

This prompted the Street to lower its expectation from asset sales, and consequently put pressure on the stock. Therefore, the conclusion of the ZIV sale also restores faith that Crompton is on the right path to monetise its assets, even as the latest deal is for only the automation business.

However, the Street believes that for the full benefits to reflect, it is necessary that Crompton finds success in its ailing overseas power division, where analysts are expecting a loss of roughly Rs 200 crore over two years (FY17 and FY18). 

Until then, the upside may be capped at the current levels for its stock price. This is despite a promising recovery in its domestic business. Crompton's standalone (domestic business) results surpassed analyst expectations, posting revenue and net profit of Rs 1,160 crore and Rs 72 crore, respectively. 

With operating profit margins also touching 6.6 per cent, recovery in the order book (Rs 3,630 crore as on December 31, 2016) largely lead by railways, offers more scope for higher productivity. 

Analysts at Edelweiss expect the company's standalone earnings to grow by 14 per cent annually in FY18 and FY19 led by healthy profitability in power business and strong uptick in the industrial segment. 

Therefore any success in hiving off the remaining overseas power business even in parts could change the course for Crompton Greaves' stock. Until then, analysts prefer to be in wait and watch mode.