Crompton Greaves

Crompton Greaves Ltd – CGL has approved an investment of Rs 2.3 bn in equity shares of Rs 10 each of Avantha Power and Infrastructure Ltd (APIL).The investment will be made at book value and would represent approximately 41% stake in APIL. APIL, a group company is engaged in generation, transmission and distribution of power.

Market’s reaction has been negative to this move.Following the announcement during trading hours, the stock had a sharp correction. The investment is of a long-term nature as returns in the form of dividends would be generated only after a period of 3-4 years (being the execution time frame).

Pricing of stake – Rs 2.2 bn for a company developing 1200 MW project:
CGL would be investing Rs 2.2 bn in APIL for a 41% stake. APIL is already in the middle of developing 1200 MW of project consisting of 600 MW each at Korba and Jhabua. This project has already made significant progress so far as necessary prerequisites is concerned. Thus to that extent the risk involved with this project is limited.

CGL has also indicated that the pricing had been approved by independent directors. Pricing of stake appears to be reasonable. Equity commitment of a 1200 MW project assuming 70:30 debt equity ratio works out to Rs 14.4 bn. Thus for a 41% stake equity commitment would be Rs 5.9 bn, however CGL is paying only Rs 2.2 bn for the take.

Buyback of equity shares.
CGL has approved buyback of equity shares of Rs 2/ each from the open market at a price not exceeding Rs 170/- per share, upto an amount of Rs 2.2 bn (25% of paid-up capital). At the current price, the maximum stake that can be bought works out to 5%.

Impact on balance sheet.
The total outgo on account investment in APIL and Buyback works out to Rs 4.5 bn.The company could end the year with a cash of Rs 2.7 bn after incurring capex of Rs 2.0 bn. Thus, the company may have to raise debt for funding substantial portion of investment.

Valuation.
CGL is currently trading at 8.8x and 7.6x FY09 and FY10 earnings respectively. Investors could accumulate on declines with a long term view.

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