Shareholders with a long-term perspective of five years can hold the stock of Crompton Greaves. The recent acquisition of automation products-maker, ZIV of Spain, will add more product lines to its current portfolio. That said, the deal will yet again pose challenges of integration with an European company at a time when the region is facing a slowdown.
This only adds to Crompton Greaves’ woes of aggressive domestic competition and slowdown in foreign subsidiaries. While the acquisition will be earnings-accretive immediately, it may not sustain after the first set of consolidated numbers.
At Rs 116, the stock of Crompton Greaves trades at 14 times its likely consolidated per share earnings for FY-13. A large order that ZIV received a while ago is likely to drive growth this fiscal.
The acquisition
Crompton Greaves recently acquired the Spain-based ZIV group for an enterprise value of €150 million (Rs 1,000 crore), with a debt-free and cash-free balance-sheet. The acquisition was funded equally by debt and equity.
ZIV is into substation automation and smart grid applications with operations in Spain, Brazil and parts of Western Europe. Its presence in India has been through a joint venture with Crompton Greaves. It won its first Power Grid order here last year.
At two times trailing sales and 13.6 times earnings, the acquisition value does not come cheap when compared with valuations of other transmission and distribution plays in the region.
At €75 million (Rs 520 crore), ZIV’s trailing 12-month revenue is 5 per cent of Crompton Greaves consolidated sales for FY-12. But ZIV’s EBITDA is 13 per cent of the new parent’s FY-12 earnings before depreciation, interest and taxes, suggesting that ZIV offers a high-margin business.
Inorganic route
Crompton Greaves has traditionally taken the inorganic road to growth. This is the company’s tenth acquisition since it chartered this path in FY-06. The company has largely been successful with these acquisitions, which helped it grow fast, soon after its restructuring in early 2000. In fact, it was successful in also turning around some of its acquired companies. The acquisitions either added a product line or brought in new technology or helped expand to new geographies.
Given this otherwise successful background, what makes the current acquisition a little risky at this juncture?
For one, ZIV receives 70 per cent of its sales from Spain, a nation currently reeling under slowdown. The company’s current order backlog is tilted towards a large order (for meters) that it received from a major Spanish utility player, Iberdrola. Iberdrola is said to have taken a hit in earnings in the first half of 2012 as a result of adverse regulations locally.
With uncertainties on capex spending by Spanish utilities due to tariff-related issues, near-term prospects for this company may remain muted. Two, ZIV has had a volatile growth trajectory. It saw sharp fall in sales in 2008 and 2009 before an improvement.
Adding too many foreign subsidiaries has already made Crompton Greaves susceptible to the vagaries of the other economies. Crompton Greaves’ guidance of the new acquisition, touching €200 million of sales in 2-3 years, appears aggressive at this juncture.
Three, despite the slowdown in the region, the acquisition did not come cheap. As there were multiple competitors to buyout a good chunk of ZIV from private equity players, Crompton Greaves is said to have paid a premium to secure its interest in the Indian market.
ZIV offers a good product range that will help fill the gaps in Crompton Greaves’ current offering in India and help deal with local competition.
ZIV appears a sound play in grid automation technology, which holds good prospects locally. And ZIV is not new to Crompton Greaves, given the local joint venture.
But retaining employees in ZIV, given that it is a technology developer, is a key. An improvement in the economic situation in Spain and rest of Europe (where most of Crompton Greaves’ subsidiaries are) will be key to the stock’s long-term prospects.
Crompton Greaves’ June quarter earnings inched up by 8 per cent over a year ago. This is an improvement over the earnings decline seen in all four quarters in FY-12.
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