Initial Crompton deal value seems on lower side:P Lilladher

Anuj: How do you read the situation right now? The stock has recovered from the low, but how do you read this entire transaction and what is your call on the stock?

A: Basically the initial day’s value seems to be slightly on the lower side because they have taken up 34.3 percent stake for Rs 2,000 crore. So, that values the company at about Rs 5,800 crore. That was lower than what we and street were estimating. While the deal value comes as a disappointment, we believe that there is some potential for rerating once the consumer business gets demerged because some of the other peers like Havells are trading at a significant premium to the kind of valuation this deal has seen. So, prima facie, though there might be some disappointment we think that after demerger the entity could potentially see some upside.

Ekta: So would you recommend investors to possibly buy into Crompton right now?

A: The problem with Crompton has not been the consumer business but it has been the international subsidiaries which have been taking time to turn around. So, the call on Crompton is more about turn around in the international subsidiaries. So, in fact we would recommend the current holders to keep holding on Crompton and any investor who wants to buy the consumer business can actually buy it once it gets demerged in October-November. So, it will be a pure consumer that he is buying.

Ekta: What is the prospect of the Crompton Greaves consumer electricals business once it gets demerged into a separate entity? Do you think that that would have value and how much and the future prospects?

A: Yes, obviously. It is growing at about 10-15 percent per annum. It is one of the better franchises in the consumer goods in terms of it is market leader in its category like fans. And it has a high return on capital (ROC) business. So, once demerged, that entity should get a valuation. Our value for the consumer business was about Rs 110-120. We will definitely see upside once the demerger happens but however we need to get more clarity on demerger in the terms of demerger before arriving at a fair value in terms of valuations because there might be, we do not know whether is there any one time payment for royalty or if any debt is being transferred. So, all those things are moving parts as of now.

Anuj: One of the brokerages mentions the possibility of an open offer after the business is listed. Would you share that here?

A: Yes, there could be a possibility of an open offer because there is substantial stake that is being, getting transferred. So, there could be a possibility of an open offer.

Ekta: You did mention transfer of debt. We do understand from sources at this point in time that there could be a debt transfer of approximately around Rs 700 crore. How would you read that?

A: Since we do not know whether this is for sure or not, but yes, accordingly the valuation has to be adjusted. So, if there is a debt transfer we will have to bring down our value accordingly. So, we do not know if, we will need more clarity on this one.

Ekta: Just one last question. Wanted one, your rating, your target price on the stock if you have it at this point in time unless it is under review? And how you would value the residual business?

A: We have a accumulate rating on the stock with a target price of Rs 200.