CG Power acquisition likely to double revenues of Tube Investments

But turnaround could stretch its finances in short term

Tube Investments of India (TI India) and its parent Murugappa Group is no stranger to mergers & acquisitions. Over the years, it has taken the acquisition route to enter new industries or fortify its market position in its core business. 

The CG Power acquisition would, however, be of the biggest for the group. The deal will transform TI India into one the country’s largest capital goods makers and will more than double its revenues. It will also mark the group foray into electrical equipment segment. TI is currently an engineering and metal product company and is a tier-I vendor to automobile makers and rail coach manufacturers.

The Murugappa company’s last major acquisition was in 2012 when it bought a majority stake in Shanthi Gears for cash outgo of Rs 292 crore. That was, however, relatively small deal. Shanthi Gears only added around 5 per cent to the company’s consolidated revenues in FY12. 

In contrast, CG Power is bigger than Tube Investments despite a sharp contraction in revenues last fiscal due to its financial difficulty and various management controversies. CG Power reported consolidated revenues of Rs 5,158 crore in FY20, down 31 per cent year on year (YoY). In comparison, Tube Investments reported consolidated net sales of Rs 4,750 crore in FY20, down 17 per cent YoY. 

The asymmetry in size may require more hard work from TI to integrate CG Power within Muruggapa Group and may also require greater resources to turn around its operations. CG Power reported consolidated net loss of Rs 2,166.5 crore in FY20, against Tube Investments’ consolidated net profit of Rs 306 crore last fiscal.

The Street is, however, convinced about TI’s ability to turn around CG Power operations without hurting the finances of its existing businesses. 

“The group has largely grown through acquisitions and has a chequered history of turning them around starting with the group flagship EID Parry. As far as I can remember, none of the one group’s past acquisitions in sugar, fertilisers, agro chemicals, or engineering has failed,” says G Chokkalingam, founder and managing director of Equinomics Research & Advisory Services. 

He said the group had a talent for cost-cutting and productivity improvement. “Given the size and scope of CG Power’s global operations, there will be lot of scope of for cost optimisation and productivity enhancement in its manufacturing operations. This will make it easier for TI India to turnaround CG Power operations, especially if their backing allows it to win more orders and this raise its revenues in next 5-6 quarters,” said Chokkalingam. 

Equity investors seem to share this optimism. TI India’s stocks price rallied after the deal was announced and closed the day up 6.2 per cent. CG Power also witnessed fresh buying from investors and hit the upper circuit of 5 per cent on Friday.

For now, TI India and Murugappa group have to raise Rs 700 crore to fund the acquisition. Analysts say raising the money will not be a challenge given its near debt-free balance sheet but incremental borrowing will worsen its balance sheet ratios at a time when the financial outlook for engineering and capital goods sector is tough.   

Murugappa’s long-term challenge would be to lighten CG Power debt burden and bring it in line with that of other group companies. The company reported consolidated borrowings of Rs 1,661 crore at the end of March this year on interim basis while its net worth of negative Rs 104 crore. Company’s total financial liability was around Rs 5,000 crore at the end of March this year. 

CG Power provides a new growth opportunity for Murugappa but its turnaround could test the group’s reputation.