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Profit From Low Valuation

Crompton Greaves is available at an attractive PEG ratio. Buy with a long-term view in mind…

Crompton Greaves manufactures distribution transformers which it sells both in India and abroad. Within the country it has a consumer products business that sells lighting products and fans. It also manufactures machines for the industrial segment.

International business.
Due to political problems in the Middle East buyers did not take delivery of ready orders. Shipment to the tune of Rs 180 crore was deferred. This resulted in a pileup of inventory. The company now plans to sell off this inventory at spot prices (lower rates), which will affect its margins.
The company’s distribution transformer business in Europe is likely to be affected by the economic slowdown in Europe.

Domestic consumer business.
The fan segment of the domestic consumer business has slowed down. Sales were affected due to a 15 per cent price hike in March 2011. This is now being reversed. Rising interest rates have also had an impact.
Competition from Chinese and Korean companies has taken a toll on the margins of the domestic power system business. Higher cost of raw materials has also affected the company’s margins.

Industry segment.
Slowing industrial capex could affect this segment as well.

Lower tax rate.
The company’s management expects revenue to grow at the rate of 8-10 per cent and profit after tax to be flat in FY12 compared to FY11, thanks to a lower tax rate. Its R&D spending is set to go up from 1.6 per cent of sales in FY11 to 2.5-2.75 per cent in FY12. Earlier, only a part of its R&D facility qualified for tax shelter, but now all its facilities will be eligible. Hence, it expects to attract a tax rate of 14-15 per cent in FY12 compared to 25 per cent in FY11.
Growth is now expected to resume only in FY13.

Valuation
The company is currently trading at a 12-month trailing PE of 12.57. This is much lower than its five-year median PE of 20.87. Over the past five years its earnings per share has grown at an annual rate of 31.81 per cent. This gives it an attractive price-earnings to growth ratio of 0.39. Buy the stock with at least a three-year horizon to ride out the current slowdown and profit from future growth.