India Ratings & Research (Ind-Ra) believes that Crompton Greaves(CGL; 'AA'/Stable) proposed hiving off of its consumer products division to a subsidiary, Crompton Consumer Products (CCPL) is not likely to significantly impact CGL's credit profile.

Ind-Ra expects the loss of the steady and large cash flow stream from the consumer products division to be offset by CGL's improved leverage on re-alignment of debt within the group.    

CGL and the Avantha group will have a 25% and 25.78% stake in CCPL respectively. CGL has filed a proposal with SEBI for the demerger and expects to get an approval by January 2015 after which it will apply to the High Court for further approvals. The appointment date of the de-merger is 1 April 2015 as per the scheme of de-merger filed with SEBI.  

Based on discussions with the company, Ind-Ra understands that given the high growth potential and lack of synergies with the power and industrial products businesses, it is prudent to shift the consumer products business to a separate company. With an independent management, CCPL would be able to better focus on achieving high growth by developing additional products and expanding its distribution network.

The strong operating cash flows of the consumer products division suggest CCPL's fairly high debt capacity. The consumer business which contributed 21% of the company’s revenues, 48.1% of PBIT and only 2.3% of capital employed in FY14 was the most profitable division for CGL in FY14. Ind-Ra expects the adverse impact from the loss of this cash flow stream to be mitigated by the de-leveraging likely to be achieved once the business is restructured.

Shares of the company gained Rs 2.1, or 1.12%, to settle at Rs 188.80. The total volume of shares traded was 638,993 at the BSE (Tuesday).