Monday, November 5, 2012

Finally - near double digit price targets on Crompton Greaves

Crompton Greaves came out with numbers after markets closed on Friday and the street was 'disappointed', sorry it was 'shocked', especially with the EBITDA performance where for some reasons, the analysts were hoping for a miracle. It has now been more than 6 quarters since my first blog on Crompton Greaves, and I am really amazed how this stock still remained among top picks all through last year.

Thankfully, after yet another 'shocker', some of the leading brokerages have moved their price targets closer to double digits. ML has cut the target to Rs 110 and MS to Rs 108. Over the last 1 year, one thing has stood out despite Crompton's repeated quarterly misses - it remains a very expensive stock. Just to quote from the ML report this morning - 'Stock still trades at 14.4x our FY14E PE, in line with its long
term average (10-yr) despite lower margins, higher earnings volatility and lower

And this is where the problem lies. Can anyone honestly predict 2014 earnings for Crompton? The company misses the most pessimistic estimate by a good 40% and here we are working our excel sheets predicting 2014 numbers and talking about how the stock will eventually bottom out. Here is the headline of the Goldman Sachs report 'Near-term pain, medium-term margin improvement thesis intact'. This pain has now run for 7 quarters, by no mean near term. The report also says 'we expect the benefits of cost cutting and restructuring to be visible in FY14E and expect consolidated margins to improve 340bps in FY14E'. Please, you got to be kidding here!!!

I have always maintained that Crompton Greaves at some point will become a buy. But that point is still some distance away. At some stage during this quarter, expect the stock to reach closer to double digits. Its still an over-owned, over-researched stock and while it may make trading gains for swing traders, serious investors should just forget about it till it comes out with 2-3 quarters of good numbers. If the story turns around, this stock will have no problems racing towards 400-500, so it would hardly matter if you miss the first 20% of the run.