Crompton Greaves: Below expected results, Insider Trading feelings, Aircraft purchase –DISASTER

Crompton Greaves Limited declared results for the June quarter 2011 and what followed was a disaster. The share price which was Rs 242.10 at the close of Monday the 18th of July crashed in the next two days to Rs 176.95, a fall of a staggering Rs 65.15 or 26.9%. The share recovered to close the week at Rs 182.55, for a weekly loss of Rs 59.55 or 24.59%.

The reasons for the same are quite a few: –

  • The quarterly results saw the topline grow from Rs 2302 crs in Q1 of FY11 to Rs 2438 in Q1 of FY12. The growth quarter on quarter was just 5.9%. However on sequential quarter there was a drop from Q4 FY11 of Rs 2908 crs, a drop of 16.2%.
  • The EBITDA margin has dropped significantly from 12.9% in Q1 of FY11 to 7.5% in Q1 of FY12. This drop is 545 basis points and is almost similar to the sequential quarter drop of 537 basis points.
  • The Managing Director of the company Mr Trehan who retired from the post on 1st June 2011, but continues to remain the Vice-Chairman of the company sold 1,80,000 shares of the company on the 29th June, 30th June and the 1st of July, which the analyst community believes to be insider trading. The person concerned has offered explanations which are not being bought, as even after demitting office as Managing Director, Mr Trehan has been on road shows for the company and reiterated the guidance given by the company.
  • The company has spent Rs 250 crs on purchase of an aircraft which is nonrevenue earning for the company and shareholders have not liked it as well.
  • To add insult to injury, the company has been trying to defend itself and that the action of the former MD is within the rules and confirms to corporate governance.
  • The new Managing Director Mr Mortimer reiterates that the earlier guidance is not maintainable, and has lowered the same which is further irking the investor community as the former MD as late as the third week/fourth week of June was talking about the same being maintained.

I believe the damage which has been done is severe, and the credibility of the company has been beaten out of shape. The aircraft which cost Rs 250 crs has seen the company lose a market cap of over Rs 3,800 crs in a space of just two days.

Daily over last one year

Over last fortnight

The severity of the fall can be seen from the charts attached above. It has been a whitewash and had it not been for some buying support from a local mutual fund, things could have been worse.

What Next?

I believe the share needs to consolidate at current levels and one needs to watch the performance of the company over the next few quarters to see what levels of profitability are sustainable. On the investor front, the new Managing Director needs to meet the investor community and do some reassuring on the governance front without being seen as defending the former MD.

The lesson to be learnt by promoters is that the investors are more aware of their rights and apparently the callous attitude of promoters towards investors needs to undergo a sea change.

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