Crompton Greaves should stay invested

Electrical engineering goods manufacturer Crompton Greaves, was beaten down by the investors on the bourses yesterday. It was down by around 4% on news that it has decided to scale down its capital expenditure, due to a softening demand, in the aftermath of the global economic crisis. It has decided to scale down its capex for the fiscal to Rs 150 crore from the earlier target of Rs 220 crore. Till date, the company has spent Rs 130 crore but given the volatility in the market, by March 2009, it will only spend another Rs 20 crore. For the fiscal 2009-10, the company will continue to have a capex in the range of Rs 200 crore. If the macro situation is not too good, it makes more economic sense to scale down rather than engage that money which might not even earn the returns. Crompton is not an isolated company which has scaled down capex, it is like the rest of the world, a victim of the global crisis and slowdown.

The company overall remains strong, fundamentally. For the second quarter ended 30th September 2008, it posted a PAT of 120.12 crore, up 32.09% on a YoY and total income rose to Rs.2,098.35 crore, up from Rs.1,583.61 crore in Q2FY08. On a consolidated basis, total income stood at Rs.2,105.28 crore against Rs 1,589.58 crore in the earlier year and PAT was up 32.09% at Rs 120.12 crore. Most importantly, in this era of high interest costs, this company remains totally debt free.

Crompton’s total order book position for current fiscal stands at Rs 7,400 crore with the international business contributing Rs 4,400 crore and the rest from domestic market, to be executed over the next 12 months. By then the slump, especially in the domestic markets would have corrected and being a major supplier to the power sector, slowdown or no slowdown, this is one sector which in India will continue to attract business. It hopes to end the fiscal with a growth of 18-20% in topline and bottomline.

Cutting down the capex is not a huge negative and those convinced about the fundamentals of the company should stay invested.
thanks