Crompton trips on bleak outlook

Crompton Greaves was again in the eye of a storm, forcing the management to go into a damage control mode. While the disappointing first quarter results announced yesterday were the biggest trigger, weak management guidance was a further dampener.

Investors and analysts also questioned an expensive aircraft acquisition in the March quarter and possible insider trading.

The result was predictable. The Crompton stock crashed another 15 per cent to Rs 177 on the Bombay Stock Exchange (BSE), after a similar drubbing on Tuesday.

This on a day the capital goods index was down just 1.45 per cent and the Sensex fell 152 points, or 0.81 per cent.

The management went into action early in the day to explain the insider trading allegations that started on Tuesday.

According to a company statement on the BSE website, S M Trehan, non-executive vice-chairman, sold his entire holding of 180,000 shares of the company - at an average price of Rs 260 a share - between June 29 and July 1, after he stepped down as the managing director (MD) on June 1.

"There is anger about Trehan selling shares," said S P Tulsian, an independent stock analyst.

Trehan, however, clarified that he had taken permission from the company secretary and legal and regulatory authorities before selling - an argument that didn't seem to convince the market.

Analysts also expressed concern over the company's capital expenditure more than trebling in FY11 to Rs 440 crore (Rs 4.4 billion), partly on account of a Rs 270-crore (Rs 2.7-billion) acquisition of an aircraft. The company called it an "investment".

This, and higher working capital, resulted in return on equity falling from over 35 per cent in FY10 to around 30 per cent in FY11.

"The company has not given any concrete explanation for the aircraft purchase except that it has manufacturing facilities at various locations worldwide and thus needs faster transportation of key management officials. We are worried about the amount," said an analyst who attended a post-result conference call with the management.

In his detailed clarification, Trehan said he was not holding any executive position from June 1, when he retired as the CEO and MD.

"So, I am not privy to any information since June 1, till I sit on the board on June 19 as a non-executive director. These stocks were bought by me 11 years ago when I was made the CEO. I was very clear that day

itself that when I leave the position, I will sell them, because I don't dabble in stocks," said Trehan.

He said there was nothing ethically wrong in his exiting "when I am leaving the CEO's position because I need my own cash management as a retired executive. I don't get any salary now from Crompton Greaves".

Even after Trehan's clarification and the conference call, selling continued, especially in the post-noon session.

In retrospect, even in April, as the outgoing MD, Trehan did caution analysts that increased competition, higher raw material prices, fewer orders, slowdown in Europe, political crisis in key markets of West Asia and North Africa and margin pressures would affect profitability till the middle of this financial year.

Yet, institutional investors and fund managers hung on to the stock. Many of them are now pressing the panic button, comparing this with investor ire in companies such as Wockhardt, Exide and L&T some years ago.

The first quarter numbers disappointed: A 58 per cent year-on-year drop in consolidated net profit (Rs 79.5 crore); a subdued top-line growth of 6 per cent (Rs 2,438 crore); and poor operational performance (39 per cent decline in operating profit to Rs 182 crore).

The consolidated performance, though strictly not comparable year-on-year due to inclusion of the recently-acquired Sweden-based Emotron Group and US-based QEI, was marred by poor performance of subsidiaries (40 per cent of sales and largely comprising the power systems business), which witnessed flat sales growth in rupee terms and incurred a net loss of Rs 49.5 crore (Rs 495 million) compared to a Rs 49 crore (Rs 49 million) profit in the same quarter last year.

Standalone results also disappointed with 285 basis points (bps) and 181 bps fall in operating and net profit margins, respectively. Top-line growth was, however, better at 9 per cent.

The outlook continues to be cautious due to sluggishness in the domestic transmission and distribution market (23.5 per cent decline in order inflows in Q1, over a 20 per cent decrease in FY11).

The shocker was the growth in consumer business, which plunged from an average 20-30 per cent growth until March-end to 2 per cent.

The company has revised downwards its revenue growth and margin guidance. From the earlier figure of 15-16 per cent and 12-13 per cent for domestic and global operations, respectively, it is now talking of a consolidated figure of 10-12 per cent. Margins will be down to 8-10 per cent compared to 13.4 per cent in FY11, says the company.