Is CG Power Close To Selling Loss-Making Hungary Business?

Shares of CG Power Ltd. have risen 15 percent over the last two weeks as its management had suggested it will sell overseas loss-making businesses by June.

CG Power's operations in Hungary, Belgium and Ireland are loss-making, with Hungary contributing the most. The Mumbai-based maker of power generation, transmission and distribution equipment expects its Belgium and Ireland operations to turn EBITDA-neutral in the current financial year.

KN Neelkant, chief executive officer and managing director of MD of CG Power and Industrial Solutions, in a post-earnings conference call for the quarter ended March, indicated the delay in closing the deal — that missed its third deadline in June — was due to the April elections in Hungary.

The company's shares have declined nearly 40 percent from its last peak in January. That compares with a nearly 21 percent decline in the BSE India Power Index.

A recent note by research house Citi listed two reasons for the depressed value of CG Power's stock:

• Failure to sell international business in a timely manner in one go.
• Failure to dispose unprofitable smaller businesses.

The brokerage also said the delays are leading to increased carrying costs.

The divestment in Hungary is critical for CG Power as it incurs a cash outlay of Rs 100 crore per quarter that is funded through its India arm. A potential sale will reduce the company's debt, which stands at Rs 2,540 crore, by Rs 300 crore. According to Citi, no funding will be required from India once the Hungary sale is completed.

The company had received a binding offer for its Hungary operations from Ganz Villamossagi and Alester Holdings for 38 million euros in August 2017. The business was impacted due to changing political environment in Iran, Iraq and Algeria.

Avantha Group, the promoters of CG Power, had sold their consumer business to Advent International and Temasek in April 2015. Their efforts to sell part of their international operations in 2016 — the transmission and businesses in Indonesia, Hungary, Ireland, France, US and Belgium — to the private equity firm First Reserve didn't materialise due to valuation differences. First Reserve offered 115 million euros, which CG Power didn't perceive as attractive.

Now, a possible sale of Hungary unit could open the doors to similar deals for CG Power in France and Belgium. Neelkant, in the conference call, said the management's focus and bandwidth is on the Hungary divestment and till such time it's closed, they'd “not open a new chapter of divestment”.

While the delay in sale of the Hungary business is a major dampener, Macquarie analyst Inderjeetsingh Bhatia wrote in a note., the Street, according to him, is ignoring the company's improving operational performance and is unduly worried about the delay in sale. Still, the closure of the sale is key for a re-rating of the company, he said.