Wednesday, July 20, 2011

CROMPTON GREAVES: EVERYONE IN DENIAL MODE

CROMPTON GREAVES: EVERYONE IN DENIAL MODE
First up, my apologies for not writing for so long, I don’t have any real excuse, can assure that I would be far more regular now.

Now for the last 2 days, the stock that has hogged limelight is clearly Crompton Greaves, down nearly 15% on Tuesday and as I write this, it’s down 15% today as well. What amazes me is how the analyst community is shocked and how investors are dumping the stock as if something unpredictable has hit them.

I would just like to present some data first. We all know how steep the fall was for Crompton Greaves after Q4 earnings and one would have been forgiven to assume that there has been massive offloading of the stock. But just take a look at the following numbers

- Institutional holding at June end is 41.5% vs 42.4% at March-end
- Institutions pared only 0.9% stake in Apr-June quarter
- FII holding at 21.4% at June-end vs 21.7% at March-end
- Domestic insurance cos’ stake at 5.25% at June-end vs 5% at March-end
- Mutual fund stake at 12.7% at June-end vs 13.7% at March-end

How this stock remained in such an overbought zone is beyond my comprehension.

Now one more startling fact. The consensus price target from brokerages on the stock was Rs 323, with some bullish brokerages even predicting Rs 347, and the most bearish I saw was Rs 240. Most of these analysts believed it’s a blue chip and Q4 was just a one off and how last quarter was a good buying opportunity. As I write this, the stock is at Rs 176.

Just take a look at what one of the most respected foreign brokerages wrote after the conference call today.

Brokerage: “Biggest negative is the fact that there is no one time costs in the results, belying street hopes that it was largely one-offs”.

Now was the street really hoping that it was a one off? Didn’t SM Trehan, the outgoing MD of the company in last quarter commentary say that this pressure will continue for two more quarters? Where was this hope for street coming from? Is this the case of you being more loyal than the king himself? Come on, one of the most respected CEOs is saying I will disappoint you for 2 more quarters and you still believe that everything was hunky dory? In fact SM Trehan sold all his 1.8 lakh shares during Jun 29-July 1 at an average price of Rs 260. Since then, there has been a clarification that Trehan sold his stake after taking due permission from the company secretary and before the trading window closing. Nothing wrong with that, as outgoing MD last quarter, he himself didn’t have the confidence on the company for next couple of quarters. Why did the investors and analysts have the confidence despite this data?

Some of these analysts are paid top notch dollars for being so far behind the curve. Now, interestingly some of them will downgrade the stock with ridiculously low price targets and may be that is where stock will bounce back. A case in point being SKS Micro, where when everyone turned bearish with sub 200 price targets, the stock rallied nearly 80%. Not to suggest the same will happen with Crompton Greaves as it needs to shed a lot of this over-ownership.

The biggest lesson a shareholder can learn is not to take these brokerage reports on face value. Having committed to a view, they are slaves of that view, they are in total denial mode and it doesn’t help when your hard earned money loses 30% of its value in 2 days despite the warning signs which were presented to you by the management itself.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation.

8 comments:

  1. hello,

    now that the company has hit a 52wk low, is there a chance to bounce back sharply?

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  2. y is it that the anchors of business channels cant trade in stock mkts as it is written in ur disclaimer...n yes sir u r very true in saying to not believe in the brokerage reports....n m also a victim of sks stock bought at 1100..n still holding..n can u plzz suggest me a book on techincal analysis..

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  3. Good write up Anuj!! I so completely agree. Do you also have views on the the consumption boys - Jubilant foodworks, tata coffee and the likes?

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  4. My favorite blogger is back! I really enjoyed reading this one, Anuj. Thanks!

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  6. THANKS MR. ANUJ. I HAHAVE BOUGHT YESTERDAY 1000 SHARES OF CROMP. GRVS. @208/-
    WHAT TO DO NOW ? HOW LONG I HAVE TO WAIT? PLEASE ADVICE . REGARDS.
    A.BHATTACHARYYA

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  7. @Alok: Thanks so much

    @Asish404 and @Saheer: My experience tells me that while there may be pullbacks for stocks from oversold zones, those are actually selling opportunity, Now Crompton may bounce back to over 200 on short covering but my sense is that over next 3 months, it may even go below 170. You should wait for first signs of business stabilising before buying, no harm in letting go the first 10% rally, if you can catch the 40% that will follow

    @Gaurav: I had done some research on how horrendously expensive Jubilant is, will soon put that on blog

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  8. Really insightful.. Aren’t these brokerages accountable to their clients?? Pegging a price target of 300+ when the stock is hitting a fresh 52 week low everyday.. Appalling

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