DEAR SHAREHOLDERS
As we all know when a cabinet shelf or drawer becomes untidy or unmanageable it istime for spring cleaning. That is exactly what the Board of Directors of CG Power andIndustrial Solutions Limited (‘CG') and senior management have been doing over thelast two years. Let me take you through the process.
CG had made some excellent and very attractively priced international acquisitionsduring the first decade of the 21st century. These earned healthy profits in theirfirstseven to eight years under CG on account of better managerial oversight and due to aneconomic boom in global markets. After the crash of 2008-2010 both European and NorthAmerican demand for power systems and solutions started to dry up. Meanwhile operationalcosts had risen due to manufacturing problems which started showing up on the shop floorsleading to re-work. All these negative factors combined to create a situation when theEuropean and Canadian operations started making losses— first relatively small andthen progressively larger swamping the profits of your Company's India-based power andindustrial systems operations.
Some hard decisions needed to be taken. A major restructuring initiative was calledfor. Your Board of Directors unanimously decided to hive off the structurally lossmakingentities in an effort to focus on your Company's core competence—that of theprofitable power and industrial systems business out of India and the power systemsbusiness in Indonesia.
Consequently we first sold the Canadian enterprise in Winnipeg in FY2016 for anenterprise value of Canadian $20 million wound down unprofitable entities such as thesystems businesses in the US Brazil and the UK and entered into a binding agreement withFirst Reserve a leading global private equity and infrastructure investor for the saleof selected transmission and distribution businesses (T&D) abroad at an enterprisevalue of€115 million. Regrettably despite extensions to the ‘long stop date'the deal did not fructify as certain conditions precedent to it remained unfulfilled.
Therefore your Board of Directors decided to terminate this transaction in December2016.
In the meanwhile efforts were on to And a suitable buyer for the Company's powerautomation business that worked under the umbrella of ZIV an international companylocated at Bilbao in Spain. We were successful in this endeavour.
In March 2017 we sold ZIV along with its subsidiaries and related automationbusinesses in the UK Ireland France and India to Alfanar Electric Systems Co. SaudiArabia for an enterprise value of €120 million much of which was used to pare downinternational debt to safe levels. Simultaneously we immediately rationalised ouroverseas cost structure in line with the business size and scale.
Within India too we divested ourselves of an unprofitable venture—namely thedistribution franchise agreement with Maharashtra State Electricity Distribution CompanyLimited for Jalgaon Maharashtra. Finally at the time of my writing this letter to youwe have agreed the sale of our USA power transformer and distribution businesses to WEG ofBrazil and we continue to focus our attention to finding buyers for our other Europeanassets.
If all goes well your Company will be back to its core competency—that ofproducing state-of-the-art power and industrial systems equipment out of India andIndonesia and supplying these profitably to both domestic as well as growing regions ofthe world market.
The restructuring strategy and refocusing has begun to pay dividends. CG has startedproducing significantly better results. Let me share some of these with you. On aStandalone basis for FY2017 CG's:
• Net sales and services grew by almost 12% to 14356 crore.
• Operating EBIDTA grew by 38.66% to 1312 crore.
• Net profit from continuing operations swung from a loss of 11184 crore inFY2016toa profit of 1158 crore.
• Net profit including discontinued operations improved from a loss of 11099crore in FY2016 to a profit
1125 crore.
Though the consolidated results are still influenced by the relatively poor performanceof the some of the overseas operations
there is now a distinct up-tick. For the power systems business at the consolidatedlevel:
• The unexecuted order book (UEOB) increased by almost 4% to 13808 crore.
• Revenue grew by 7.6% to 13739 crore.
• EBIDTA (including other income) rose by nearly 13% to 1455 crore.
• EBIT grew even higher at close to 17% to 1384 crore.
• The return on capital employed (ROCE) increased by 2.4 percentage points to21.3%.
The industrial systems business posted excellent results.
• UEOB increased by 29.3% to 1882 crore.
• Revenue grew by 11.4% to 12361 crore.
• EBIDTA rose by nearly 2.7% to 1218 crore.
• EBIT grew higher rate at 12.7% to 1156 crore.
• ROCE increased by 2.2 percentage points to 16.4%.
We are clearly on the right path. It is not for me to give a ‘forward looking'statement about your Company's prospects in FY2018. But it is very clear that therestructuring and continued focus on operations has created a more sustainable financialarchitecture and that CG is better positioned to leverage business opportunities that comeout of higher economic growth in both India and across South East Asia. If India grows at7% or more in FY2018—as many have so forecasted—and South-East Asia continuesdoing well one ought to see a healthy growth in demand for power equipment rotatingmachines drives and railway traction equipment.
I would like to place on record my appreciation for the support and guidance providedby your Independent Directors to the management in achieving this restructuring.
We have good reasons to look forward to better times in the near future.
Yours sincerely
GAUTAM THAPAR
Chairman
