>CROMPTON GREAVES (PRABHUDAS LILLADHER)

Investment in a promoter group company – a negative surprise

· Acquisition of stake in APIL: Crompton Greaves (CRG) board has given approval to buy a stake of 41% for Rs2.3bn at book value in Avantha Power and Infrastructure (APIL), a promoter group company. These funds are to be utilized for the Korba 1x600mw power plant for which a debt of Rs21bn has already been underwritten, 80% of land acquisition has been completed, water allocation has been done and coal linkage are in place. Another Rs1.6bn worth of equity will have to be raised either by private equity or through group companies, which will result in dilution of CRGs stake (but will not go lower than 26%). APIL is a power generation company having 165MW capacity (by June 2009), expandable to 1365mw (2 plants of 1x600mw each) in various stages. The other stake holders of APIL are BILT, BILT paper and Solaris (all are Avantha group companies).

· Buy-back offer: CRG board has approved a buy-back of shares for Rs2.2bn upto a price of Rs170 per share. Keeping in mind that the APIL stake will be paid in cash and the current cash balance is just about Rs3.0bn, CRG will have to utilize internal cash generation over the next 9-12 months if it wants to complete the buy-back. We believe that only a part of this buy-back will be completed and in the current situation, this offer is largely there to just act as a check on the declining stock price.

· Valuation: At the CMP of Rs106, the stock is trading at 6.9x FY09E and 5.9x FY10E earnings of Rs13.7 and Rs15.3, respectively. The diversification into power generation could yield lucrative cash flows post 2013. However, in the near term this diversification would have a negative impact as the future cash flow commitments to this segment are not known. Also, to maintain its stake in the venture, CRG will have to commit larger sums of money, going ahead. Our Reduce rating stays.

To see full report: CROMPTON GREAVES