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Here is a look at how various brokerages view the demerger announcement and the stock strategy:
Barclays
Crompton Greaves board in an exchange filing has proposed to demerge its consumer products business into a separate listed company. A committee of directors has been constituted to examine the aspects of the demerger and listing. While we see this is as positive over the longer term, we expect this to have limited value unlocking potential given current valuations.
On using the sector's current earnings multiple of 20x for the consumer business, we estimate that the current valuation implies an earnings multiple of 25x for the industrial/power business. This announcement should support the valuation near term, but we see few reasons for investors to chase the story given the current valuation. We prefer relatively less expensive stocks of companies that we believe have better long-term prospects such has Voltas, KEC and Havells, in the mid-cap space. We retain our equal weight rating on Crompton Greaves.
Nirmal Bang
We believe Crompton Greaves demerger will result in unlocking of value for the consumer products business (FY14 revenue of Rs 28.5 billion, 21% of consolidated revenue) as the overhang of weak international power systems segment results in suppressed valuation of Crompton Greaves.
The consumer products business has been performing well over the past few years with an operating profit margin of 12%, strong RoCE of around 200%, high asset turnover of 4.5x and a capex-light business model. Other pure-play consumer durable listed peers like Havells India trade at a much higher valuation than CGL because of a stronger financial profile.
We expect the consumer products business, once listed, to command a better valuation and thereby change our valuation methodology to SOTP-based in order to reflect the same. We have valued the consumer products business at Rs 97/share based on 14x EV/EBITDA multiple, in line with peers, based on FY16E financials.
We continue to value the other two businesses (power systems and industrial systems) at 20xFY16E earnings, leading to a valuation of Rs124/share for the non-consumer products entity. We have retained Accumulate rating on CGL with a revised target of Rs221 (Rs193 earlier).
Motilal Oswal
FY14 has been an eventful year, in the transition phase at Crompton Greaves, with initial successes in i) geography expansion ii) moving up the value chain and iii) commissioning of new factories. The company expanded its reach in the consumer business to 134,000 retailers in the distribution segment and 22,000 retailers in rural segment; by adding 11,150 retailers in FY14. Also, modern retail format was started, by setting up exclusive stores. In fans, the net sales grew by 15% versus a market growth of 10%; Market share increased by 3.3pps to 26.6%, which is quite substantial. New product launches accounted for 30% of the revenues; and several premium products were launched. Maintain Buy, with a price target of INR250/sh (standalone business at 20x FY16E, overseas at 0.5x EV/Sales).
Angel Broking
We believe the demerger will lead to an improvement in efficiency for each of the businesses. Currently, the Power and Industrial segments are loss making, but there are high chances of they becoming profitable in future with an improvement in the economy and efficiency in operations. This will lead to re-rating of the Power business in terms of valuation.
Crompton’s consumer business is doing well, posting an EBIT margin of 11-12% along with 12-15% revenue growth. The business was being valued at a discount in the consolidated entity; the separation should improve its business outlook as well as valuation. We maintain Buy with a target price of Rs 253/share.
