In this article, we will discuss the turnaround story of CG Power, which provides end-to-end solutions to utilities, industries, and consumers for the management and application of efficient and sustainable electrical energy.
Start of the Downfall:
- To start with, we will go back 100 years back to the year 1919 when Thapar Family started a conglomerate business in Delhi.
- Over the years, this family made its presence across diversified businesses like paper, power, industrial solutions, consumer electricals, food processing, chemicals, etc.
- Fast-forwarding to Gautam Thapar, the third-generation promoter of the family who associated with the company in 1980 and made a dramatic turnaround in the Paper & Pulp business of the company.
- In 2007, Lalit Mohan Thapar, who was the 2nd generation promoter of the company died, and the control of all the business was handed over to Gautam Thapar.
- Gautam Thapar brought all the business under one banner called ‘The Avantha Group’.
- The group was having 2 flagship businesses i.e., Ballarpur Industries (BILT) and Crompton Greaves. Both the company were having a valuation of over $1 billion each. The combined revenue of each firm reaches over $3 billion.
All was going well for the company, but during the year 2005-2012, the company made around 10 acquisitions. Ballarpur Industries Limited which is involved in the paper business acquired Malaysia’s largest pulp and paper company Sabah Forest Industries (SFI) for around $261 million. Very soon, the company realized that importing materials from Malaysia was expensive as compared to local procurement. In the year 2008, the group entered the power business and committed around Rs. 5,000 Cr. to set up two power plants in Madhya Pradesh and Chhattisgarh.
All these acquisitions were funded by debt. In this case, also, the company realized that there are several challenges in the power business and also the group was facing a tough time in servicing the current debt of the power company.
Just like the failure of the acquisition of the pulp and paper business in Malaysia, the group's venture into the power business was also not fructifying.
Talking about the other business- Crompton Greaves, this company was having 2 key business verticals: Electrical business like Bulb, Fans, Mixers, etc., and Industrial Solutions like motors, power generators, etc. In 2014, Group decided to demerge these businesses, sell some stakes in these businesses, and service some debt.
The Electrical Business of Crompton Greaves was performing quite well and was a cash cow for the company. The group sold this business to a Private Equity firm for Rs. 2,000 Cr. Ordinarily, the amount received from the sale of Crompton Greaves Electrical business should have been invested in the power business, but the promoter sold their stake and took the money home. With this, the Thapar family exited the electrical business completely.
On the other hand, CG Power's debt was increasing along with weaker business prospects. To save the business, the Thapar family pledged their shares to the bankers to serve as collateral for the loan that they have taken from them. Further CG Power had a dark time during the year 2015-2019 as the company’s acquisitions were not working well and the performance was also got weakened due to the impact of a global slowdown.
Moreover, in the year 2019, the Board members of the company found some accounting lapses and operational issues in the company. On further investigation, these were the key findings:
- Understating past liabilities
- High amounts of loans and advances were given to related parties
- Major Accounting Misappropriations
In March 2019, Board members of the company sent the CEO of the company on leave and consequently, Gautam Thapar was removed from the board as Chairman with immediate effect. By the end of 2019, the Avantha Group were no longer a shareholder in CG Power as they have pledged their entire stake and ledgers have taken control of the whole pledged share. Many pledged shares were being sold by the bankers which impacted the stock price to fall. Lenders were also not left with any other options than selling the shares. Meanwhile, the share price has fallen from the level of Rs. 225 in September 2014 to just Rs. 5 in March 2020 resulting in wealth destruction of around 100%. The Market Capitalization of CG Power was around Rs. 10,000 Cr. in March 2015 which fell to around Rs. 300 Cr. in March 2020.
In 2021, Gautam Thapar was arrested under the Prevention of Money Laundering Act. Yes Bank was one of the key lenders to the Avantha Group. There was also the speculation of Gautam Thapar and then Chairman of Yes Bank Rana Kapoor. CG Power owed banks more than Rs. 2,000 Cr.
Turnaround of CG Power:
The tide slowly began to turn when Tube Investment of India (TII) acquired a 57% stake in CG Power for Rs. 800 Cr. 14 Banks that lent CG Power altogether agreed to take a haircut of Rs. 1,100 Cr. Haircut means foregoing a part of the loans so that the remaining loans can be paid via the operations of the company.
TII belongs to the Murugappa Group of Companies which owns companies like Carborundum, Cholamandalam Finance, EID Parry, etc. This group is well known for its governance and is also referred to as the ‘Tatas of the South’.
Why Murugappa Group of Companies bought a stake in such a company where there are high debt levels and low governance? TII management stated that their core business is Auto-Ancillary which is seasonal and the company wants to de-risk the business. Murugappa Group set 3 key goals for CG Power:
- Enhancing Operational Performance
- Driving Growth
- Fixing the Legacy Issues
TII restated/revised the past financials in record time. Talking about operations, the company benefited from the Power sector tailwinds that the sector witnessed due to demand recovery post-covid. CG Power’s order book, revenue order intake, and other factors began to improve. Amid this, CG Power cleared off their property-related issues as well via selling Kanjurmarg Land for around Rs. 382 Cr. and reduced the debt with the amount received. By the end of March 2022, CG Power became net-debt free.
What Should Investors Do:
The Share Price of CG Power currently trades at around Rs. 280 after falling to single-digit levels, all thanks to the business revival from Murugappa Group. Currently, the market capitalization of this company stands at around Rs. 40,000 Cr. This group is well known for reviving sick companies and for their strong governance which they implemented in CG Power as well. CG Power operates in a very asset-heavy business that had strong tailwinds in the past along with the company’s target to become a leading player in the Electric Vehicle (EV) business where they will be manufacturing motors and controllers for EVs. However one should be aware of past governance and industry issues. One should also understand that all penny stocks are not worth investing in, the turnaround story of CG Power is an exception and might not happen with each penny stock. Hence one should follow due diligence before making investment decisions.