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Abstain from buying Crompton Greaves until a clearer picture emerges about its operations…

Crompton Greaves’ Q1 numbers were below expectation. The stock has been beaten down. Should I buy the stock at its current levels?
- Ajit Kumar

Crompton spooked the markets with its below expectation results for Q1FY12. Domestic business declined by 9 per cent while consolidated topline was down 59 per cent. In euro terms the international business witnessed a decline of 9 per cent.

EBITDA margin for the international business crashed to negative 0.5 per cent in Q1FY12 from 9.2 per cent in Q1FY11 on lower sales, higher competition and lower realisations. In an analyst concall after the results, the management indicated that competitive intensity would increase further, thereby keeping a lid on profitability till at least FY13.

Consolidated EBITDA margin declined 540 basis points to 7.5 per cent vis-à-vis the 12.9 per cent seen in Q1FY11. Consolidated order book was up only 4.2 per cent y-o-y while order intake was down by 23.5 per cent y-o-y. The standalone business did not fare any better. A poor show in the power systems segment led to EBITDA margin declining by 290 basis points to 12.7 per cent. The power segment saw EBITDA margin decline by 400 basis points (y-o-y) to 12.6 per cent on account of higher competitive intensity coupled with higher commodity prices. Crompton’s consumer segment too reported a decline in margins to 13.9 per cent.

The domestic consumer segment saw sales rise by only 2 per cent y-o-y in Q1FY12 as compared to an average growth of nearly 25 per cent seen in the last eight quarters.

Adding fuel to the poor results were reports that S M Trehan, non-executive vice-chairman, had sold his entire share holding of 1.8 lakh shares in the company at an average price of Rs 260 a share (CMP Rs 149.60), just three weeks before the results were announced.

The poor performance coupled with news of insider selling incensed investors who quickly began offloading their shares. As a result, Crompton has lost around 30 per cent of its market cap in the few days after the Q1 results were announced.

Since management has also indicated that things would start getting better only by the second half of the current financial, it lends credence to market estimates that Q2 performance would be just as poor as that of Q1. We would advise you to abstain from buying Crompton till a clearer picture emerges — both for its domestic and international operations.

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