Sharekhan is bullish on Crompton Greaves and has recommended buy rating on the stock with a target of Rs 260 in its October 16, 2014 research report.
"Crompton Greaves Ltd (CGL) reported a net profit growth of 19% YoY to Rs70 crore in Q2FY2015, in line with our estimate, which was supported by a decent revenue growth and hefty rise in other income. During this quarter, CGL exhibited an overall margin improvement YoY in all the three segments; notably PBIT margin in industrial systems expanded by 151BPS YoY to 9.2%. The board of directors of CGL approved a proposal to demerge its consumer products business into a separately listed entity (called Crompton Consumer Products Ltd [CCPL]). Under the demerger scheme, existing shareholders of CGL will get three shares of CCPL for every four shares of CGL; plus CGL will hold 25% stake in CCPL upon completion of demerger. Instead of issuing equal number of shares to existing shareholders of CGL the transfer of 25% stake of CCPL to CGL does not fully unlock the value for minority shareholders (it would be seen as a strategic stake and attract holding discount while valuing CGL). Also, it gives higher indirect stake to promoters in CCPL (42.67% direct stake and around 10% indirect holding through stake in CGL)."
"During post Q2 result conference call, the management sounded fairly positive on gradual recovery of its overseas operations and signs of improvement in order inflow. However, the unfavourable structure of demerger of consumer product business has disappointed investors since value unlocking benefit for the existing minority shareholders could not percolate fully. We see a 10-15% downside in the value un-locking exercise than initially estimated. Nevertheless, the stock has corrected by 8% today and any further correction should be capitalised as a buying opportunity, despite re-working post announcement of the demerger structure, there is a healthy potential upside to our revised down price target of Rs260. We retain Buy rating on the stock," says Sharekhan research report.
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