Will Restructuring At CG Power Ever Be Done?

The company, which contributes 65 percent of the sales of Gautham Thapar-founded Avantha Group, will reorganise some of the overseas subsidiaries back into its operations after completing asset sales, merge one arm with itself, and convert private equity debt into equity, according to a March 8 statement. The move is aimed at shoring up investor sentiment amid concerns about debt and loans to the promoter group.

Shares of the power equipment maker have more than doubled since it announced its earnings for the quarter ended December. That, however, masks its poor run. The stock has fallen nearly by half in the last one year and tumbled more than 70 percent since the sale of consumer business in March 2016.

Here’s what the company announced in its latest rejig:

• It will reclassify seven international subsidiaries from ‘discontinuing’ to ‘continuing’ after selling some assets. That will have a non-cash impact of Rs 200 crore on its fourth-quarter earnings.
• Wholly owned subsidiary CG Power Solutions Ltd. will merge with CG Power.
• BOI AXA Credit Fund and KKR will convert debt into 10.80 percent stake, bringing down promoter holding to 23.58 percent from 34.38 percent. The promoters have the right to buy back shares on payment of debt.
• V R Venkatesh, chief financial officer, B Hariharan, non-executive director, resigned, while Narayan Seshadri was named additional and non-executive independent director.

What Went Wrong

The Avantha Group company has been struggling since 2011-12 when its operating profit dropped 40 percent and net profit tumbled 58 percent. Apart from higher raw material and consumable prices, costs stemming from a fire at its transformer plant in Belgium contributed to the decline.

To add to that, increasing competition put pressure on prices and several of the company’s customers didn’t take deliveries of equipment on account of business uncertainties and lower demand in Europe and North America.

In the years that followed, losses continued because of the poor performance of transmission and distribution business overseas and finance costs kept increasing.

CG Power has reported losses for four straight years, stemming from write-offs related to trade receivables, inventory and unbilled dues. Financial troubles came to such a pass that its CFO, company secretory and auditor resigned in the last financial year.

Asset Sales

As the business hobbled, the company in 2015 decided to sell its consumer appliances business. Avantha Holdings, the promoter, sold its entire 34.4 percent in the unit the consumer business to private equity firms Advent International and Temasek for Rs 2,000 crore. It was just the first in the series of assets sales that have since continued as CG Power focuses on India and pares loss-making units to lower debt.

In the last three years, CG Power offloaded its power systems business in Canada, sold its transmission and distribution vertical in Europe, Indonesia and North America, divested automation unit in Europe and exited the U.S. It also lost the distribution franchise business in Jalgaon, Maharashtra because of a default in payment.

CG Power’s Asset Sales

• 2016: Sells power systems business in Canada to PT Holdings Corporation at an enterprise of C$20 million.
• 2016: Divests transmission and distribution businesses to First Reserve at Indonesia, Hungary, Ireland, France, North America and Belgium at an enterprise of €115 million.
• 2016: Closes systems business at Brazil, winds up systems business at North America and the U.K.
• 2017: Sells ZIV in Spain and related automation businesses in the U.K., Ireland, France and India to Alfanar Electric for an enterprise of €120 million.
• 2017: Divests its U.S. power business for $37 million.

Entire Promoter Stake Pledged

Debt is not the only concern. Avantha Holdings, the promoter, has pledged all its stake in CG Power and Ballarpur Industries Ltd. to cover debt. Some of these pledged shares were invoked by Vistra ITCL (India) Ltd., the debenture trustee for BOI AXA Mutual Fund and KKR, on March 10.

Avantha Holdings had issued non-convertible debentures worth Rs 889 crore which are redeemable in July this year. It also has a Rs 230-crore loan from Yes Bank Ltd., of which is Rs 189 crore was outstanding as of March last year. These borrowings are secured against a designated bank account, and CG Power and Ballarpur Industries shares.
The parent had also defaulted on Rs 83.41-crore repayment to HDFC Ltd. in the previous financial year, according to its annual report.
CG Power has yet to respond to BloombergQuint’s queries on how the parent plans to repay debt and revoke pledged shares.

Related-Party Loans

Shares of the power equipment maker tumbled as much as 32 percent in a day on Feb. 13. One of the reasons was settlement of loans to the promoter Avantha Group.

CG Power had receivables worth Rs 760 crore from the promoters as of September 2018, according to its filings. That fell to Rs 270 crore after the Avantha Group repaid Rs 80 crore and the remaining Rs 411 crore was adjusted against the future royalty payments. Multiple brokerages have cited that as a concern.

The company also wrote off pending payments from clients. The power equipment maker didn’t respond to the query if there will be more such write-offs.

What’s Next

In 2017, CG Power said Budapest-based Ganz Villamossagi and Alester Holdings had agreed to buy its Hungary business (excluding switchgear) at an enterprise of €38 million. That deal is yet to be completed and the company has extended the deadline to April 30.

Moreover, the company is looking refinance debt. The board of CG Power last year approved $250 million borrowing from a consortium of international lenders for refinancing its debt at a lower interest rate and a longer tenor.

BloombergQuint’s emailed queries on when the Hungary asset sale is expected and by when it expects to refinance the borrowings. The company is yet to respond.

Brokerage View

Citi

• Third-quarter operating performance was decent, but advances to group entities and delays in the Hungarian business divestment remain key concerns.

HSBC

• Investors are still looking for clarity on the sale of its Hungary operations, and need greater reassurance on the need for investments in loss-making subsidiaries.
• After unanticipated write-offs in the last few quarters, investors will likely wait to see cleaner earnings over the next few quarters to feel confident.
• Shares have been underperforming as the company has been unable to sell loss-making international businesses.
• Investors have been unhappy with disclosures and the nature of transactions between related parties, especially with the promoters of the company.

Morgan Stanley

• The brokerage, which recently discontinued coverage on the company, cited any delay in restructuring as adverse for near-term earnings and cash flows.
• Domestic business fundamentals are improving and the focus on restructuring of international business is a medium-term positive.
• A possible re-entry into the consumer electrical business is an opportunity in the medium term but execution is the key.