 "Crompton Greaves' buyback move is positive")
Crompton Greaves on Friday approved a plan to buy back shares worth Rs 265.7 crore from the open market at a maximum price of Rs 125 each, a 56 per cent premium to Thursday's closing price of Rs 80.15. Analysts say the move is partly aimed at countering the Street's excessive pessimism.
Crompton's shares had dropped 28 per cent in the past year, as a result of losses in the international business and a weak economic environment in India. Investors were, thus, apprehensive about the company's prospects. After the buyback plan was approved on Friday, the stock gained almost 12 per cent, to close at Rs 89.75.
While the markets have been positively surprised, the move also indicates the management's optimism and a hint at the company's valuation. At the maximum buyback price of Rs 125 a share, the company's value works out to about Rs 8,000 crore, as against the current market capitalisation of Rs 5,750 crore. At Rs 125, the price-to-earnings ratio is 13, while the enterprise value (EV) to operating profit is nine times, both based on FY15 estimates.
Analysts, though, prefer to value the company around its long-term average price to earnings band of 12 times, indicating a fair value of around Rs 120 a share, based on FY15 earnings estimates. By this forward expectation, the buyback price captures the likely gains investors could have made over the next 12-18 months.
What led to this confidence of the management? The business is gradually improving and a turnaround in the international business is in the offing.
In the past two years, the company has been facing serious headwinds in both the international and domestic markets. Net profit declined from almost Rs 900 crore in FY11 to Rs 200 crore in FY13. Operationally, margins dropped from 14 per cent in FY11 to four per cent in FY13.
The company is taking steps to cut costs and improve efficiencies. In March, its business in Hungary achieved profitability at the operating level. Even if it manages to increase overall margins marginally from the current levels, profits will get a big boost. Over the next two years, it is targeting additional sales growth, expected to boost its revenue from Rs 10,000 crore in FY11 to Rs 14,000-15,000 crore in FY15, growth of almost 50 per cent.
A substantial growth in revenue, along with margin expansion, could boost net profit. Analysts expect this to jump from Rs 200 crore in FY13 to around Rs 600 crore in FY15, aided by the restructuring of its international business.
The margins are expected to improve from current levels as the impact of restructuring sets in gradually and facilities stabilise. The worst is over for CG, which demands re-rating on the stock,” said Chinmay Gandre, who tracks the company at KR Choksey Shares and Securities.
With the restructuring of the Belgium power business completed, the company expects to save employee cost to the tune of Rs 100 crore. These factors alone, if successful, would allow the company to erase losses in the international business and report higher earnings at a consolidated level.
So, while the buyback offer is positive, the real gains would come when operational performance improves. From Bloomberg data, of the 17 analysts with a recommendation (since June 1), five have a 'buy' rating, nine have a 'hold' and three have a 'sell' on the stock-- the average target price being Rs 100.
Crompton's shares had dropped 28 per cent in the past year, as a result of losses in the international business and a weak economic environment in India. Investors were, thus, apprehensive about the company's prospects. After the buyback plan was approved on Friday, the stock gained almost 12 per cent, to close at Rs 89.75.
While the markets have been positively surprised, the move also indicates the management's optimism and a hint at the company's valuation. At the maximum buyback price of Rs 125 a share, the company's value works out to about Rs 8,000 crore, as against the current market capitalisation of Rs 5,750 crore. At Rs 125, the price-to-earnings ratio is 13, while the enterprise value (EV) to operating profit is nine times, both based on FY15 estimates.
Analysts, though, prefer to value the company around its long-term average price to earnings band of 12 times, indicating a fair value of around Rs 120 a share, based on FY15 earnings estimates. By this forward expectation, the buyback price captures the likely gains investors could have made over the next 12-18 months.
What led to this confidence of the management? The business is gradually improving and a turnaround in the international business is in the offing.
In the past two years, the company has been facing serious headwinds in both the international and domestic markets. Net profit declined from almost Rs 900 crore in FY11 to Rs 200 crore in FY13. Operationally, margins dropped from 14 per cent in FY11 to four per cent in FY13.
The company is taking steps to cut costs and improve efficiencies. In March, its business in Hungary achieved profitability at the operating level. Even if it manages to increase overall margins marginally from the current levels, profits will get a big boost. Over the next two years, it is targeting additional sales growth, expected to boost its revenue from Rs 10,000 crore in FY11 to Rs 14,000-15,000 crore in FY15, growth of almost 50 per cent.
A substantial growth in revenue, along with margin expansion, could boost net profit. Analysts expect this to jump from Rs 200 crore in FY13 to around Rs 600 crore in FY15, aided by the restructuring of its international business.
The margins are expected to improve from current levels as the impact of restructuring sets in gradually and facilities stabilise. The worst is over for CG, which demands re-rating on the stock,” said Chinmay Gandre, who tracks the company at KR Choksey Shares and Securities.
With the restructuring of the Belgium power business completed, the company expects to save employee cost to the tune of Rs 100 crore. These factors alone, if successful, would allow the company to erase losses in the international business and report higher earnings at a consolidated level.
So, while the buyback offer is positive, the real gains would come when operational performance improves. From Bloomberg data, of the 17 analysts with a recommendation (since June 1), five have a 'buy' rating, nine have a 'hold' and three have a 'sell' on the stock-- the average target price being Rs 100.