Why CG Power's US sale didn't enthuse investors

Much-delayed deal may be a small remedy for firm's Rs 1,200-cr total debt

Every time there is news of CG Power & Industrial Solutions (formerly Crompton Greaves) selling its international business, the stock price would react positively.
 
However, this was not the case when on Wednesday the company announced that it has accepted a binding offer for sale of its power business in the US. The CG Power stock rose by just about a per cent. 
 
Various reasons seem to have marred the Street mood: First, the deal, analysts said, having an enterprise value of $35 million was not surprising. “It is more or less in-line with the estimates,” said Ruchir Khare of Kotak Securities.
 
Second, analysts said they would wait to see if the sale was concluded by July 31. “The international business has been up for sale for a long time. Deals are announced only to be retracted later,” according to an analyst who has been closely tracking the stock for the last seven years.
 
Even in 2016, the sale of international business valued at ^115 million to First Reserve International didn’t materialise despite the management’s confidence on the deal’s closure.
 

While the ability to monetise on its international automation business at a premium helped cover up for this loss, analysts said this time they would renew their optimism on CG Power only if the proposed US power business sale went through within the stated timelines.
 
The caution is perhaps warranted as the standalone Indian business is now burdened with debt just to support the losses incurred by CG Power’s international operations. Had efforts to hive off the entire international power transmission and distribution (T&D) materialised in December 2016, the losses could have been contained.
 
The March quarter results remained under pressure. Even though revenues from the domestic business grew seven per cent in the March quarter, the company suffered a loss of Rs 12 crore, as interest burden of Rs 55 crore ate into its operating profits.
 
The long-term borrowing stood at Rs 504 crore as the domestic business supported the international arm.
 
This is also a reason why CG Power stock has lately underperformed compared to its peers such as Thermax, Cummins, ABB and Siemens in the transmission and distribution space.
 
“The valuation of CG Power will largely depend on the company’s ability to exit the international operations,” Khare added. Investors’ sentiment around the stock are also at a two-year low, according to analysts polled on Bloomberg.
 
“It is sad that despite the Indian business doing well and commanding a leadership position in the segments it operates in, investors prefer to stay away from CG Power’s stock. Failed promises and its impact on local operations will remain an overhang,” a fund manager said.