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The next opportunity?

Mudar Patherya 

Mudar Patherya
Mudar Patherya

At the risk of rubbing sodium chloride into pain points, let me stick the dear old bean out: The next big opportunity could well be Crompton Greaves (CG).

The company reported its biggest day fall last week; there is a shrinking audience for the CG story.

To understand why optimists have finally lost their patience (and, of course, money), it might be relevant to track how they become optimistic in the first place. This is the sequence: The great Indian story, optimism ahead of earnings growth, the earnings stagger, a delay in organisational restructuring, tired bull liquidation, complete pessimism and the sky soon falling on everyone's heads (copyright: Vitalstatistix, if you know what I mean).

Appraise some of the reasons why this, then, might be the time to start buying into CG.

One, the company is demerging its flagship consumer business over the foreseeable future. It has been the experience that whenever a prominent value driver is organisationally isolated, it attracts new voyeurs, which kick-starts fresh valuations and sets the ground for subsequent excess. This consumer business enjoys leadership and pricing power; give this business a reviving economy and some fascinating stories could be told here.

Two, the company has been losing money in its global power division. Over the past many months, the company assured analysts that this business would be divested. This proposed restructuring would do things immediately even if the company did not realise a single dollar: Moderate debt, plug losses and shrink the balance sheet. The company announced last week this transaction process would need to be revived after it rejected the terms of the existing buyer, which means the loss drain will extend for the next few quarters, compelling optimists to shriek 'sell!'.

Three, the company intends to liquidate unproductive assets including land in Mumbai, which could pare debt and resize the balance sheet.

So, on the one hand, you have a robust consumer business that will stand alone and, on the other, you will have a non-consumer business (India power and global) that will lose money at the net level. Time to, then, look at the overall valuation to see whether the company is being priced cheap or dear on the basis of the sum of the total parts approach.

Analysts are willing to put a present-day value of Rs 95-105 a share on the Indian consumer business, Rs 18 a share on the India power business, and nil on the global business. This tots up to Rs 113 to Rs 123 a share, which is where the stock is at this point.

So, where is the optimism? Nowhere. Analysts have concluded the deal is not going through; margins are declining; the debt overhang is a worry; power business revenues are down, impacted by a backdated schedule.

Which is why the worse it gets for the stock on the markets, the better the opportunity for all those willing to play for the medium-term.

There is an operative word for this. Patience.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where are not headed

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First Published: Mon, February 08 2016. 00:27 IST