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Friday, July 22, 2011

The curious case of Crompton Greaves

This is not a post about a court-room thriller, even though the title may sound like one of Erle Stanley Gardner’s page turners. That doesn’t mean that the process of discovery of the real cause behind the serious hammering of the stock price of Crompton Greaves may not be an exciting one.

First, the facts. A less than stellar Q1 result due to significant reduction in the consumer business (mainly electrical appliances) was a shock. That was followed by the revelation that the erstwhile CEO had dumped his entire stock holdings of 180000 shares earlier in the month.

The former CEO took pains to explain that:

(a) he doesn’t like to invest in the stock market but had received the shares as part of his compensation some 11 years back; at that time he had resolved to sell the shares immediately after retirement

(b) he retired on June 1, 2011 and sold the shares within a month of retirement after following due process of informing SEBI and the stock exchanges.

Doubts remained in the minds of investors because of three reasons:

1. Insider selling of large quantity of shares is considered a warning sign

2. Though he retired on June 1, 2011 Mr Trehan is still associated with the company though he doesn’t draw a salary. That means, he had insider’s knowledge about the poor Q1 performance of the company

3. The timing of the sale seemed a bit fortuitous. What if the stock market was in a deeper correction? Would he have sold his shares at lower prices? Alternatively, if the market was in the midst of a strong bull run, would he have waited a little longer to sell at a higher price?

Only Mr Trehan can answer those questions. Bottom line is that a lot of small investors were shaken by the severity of the stock price crash. Since such a crash didn’t occur when the ex-CEO actually sold his shares three weeks back, fingers are being pointed towards a bear cartel that used the fact of the insider sale as an excuse to hammer down the stock price. A fit case for SEBI to look into.

The Joint Managing Director of Havell’s – a competitor of Crompton in the consumer appliances space – does not believe that there is any cause of worry. Retail prices were hiked some time back due to increase in input costs. That may have led to consumers delaying their buying decisions. Another explanation is that distributors picked up more inventory in Q4 to avail of the then lower prices. That is why they lifted less inventory in Q1.

What should small investors do? On a TTM EPS of 10.61, the P/E at today’s closing price of 182.55 is 17.2. Not mouth-watering valuation by any means, but not hugely expensive either. If you are planning to enter, you may want to wait for Q2 results and then decide.

If you are holding the stock and are in profits, use the short-covering bounce up to book a part of it, and hold on to the rest. Remember the old stock market adage: When in doubt, stay out.

5 comments:

VJ said...

Investors are miffed that the company bought an aircraft worth 270 crore when its net profit in 2010-11 was about 70 crore. Some company officials are describing the purchase as 'investment'.

A leopard cannot change its spots !!

Jasi said...

Sir,

I had a query. HDFC has been reported to pick bucket loads of CG for 3 of its leading funds.
Should not we as retail investor take cues from it regarding its future prospects or confidence of a major MF house in it?

Thanks n regards
Jasi!
ps > I love the way you have your take on almost every happen-stance in share market. Its always gr8 to know expert your opinion.

Subhankar said...

@VJ: You can't expect Gautam Thapar to wade through jams on Delhi roads like a mere mortal!

Reminds me of the words from an old song by Traffic: 'The man in the suit has just bought a new car, from the profit he's made on your dreams.'

@Jasi: The Americans have a proverb: 'Don't dance where the elephants play.'

Have you considered the possibility that the fund manager at HDFC may have made an error of judgement? Have confidence in your own judgement.

Jasi said...

Well said! This a long with your post today, should act a good reminder for us :)
Appreciate your timely and apt posts and responses Sir!

Subhankar said...

Thanks, Jasi. You are always generous with your comments.