Short Strangle in Crompton Greaves

Crompton Greaves does it again in Q2 2011. Net Profits were down 46% YoY to Rs. 116.6 crore, Top line grew 13% YoY to Rs 2705.53 crore. High depreciation and higher tax rate pulled bottomline numbers down, which were below street expectations. Order inflow growth remains muted, which is the key concern across  the capital goods sector. Even L&T showed 21% YoY drop in order inflows in Q2 results yesterday.

After Q1 FY12 results also I had written one post on the company poor performance and corporate governance, https://writingoptions.wordpress.com/2011/07/22/crompton-greaves-new-opportunity/. Before announcing Q2 results, Crompton stock had formed base around Rs. 140 and had moved to 165 odd levels. Management  bought some shares around that level and the company also decided to sell its Rs 270 crore aircraft after large investor protests. Crompton stock closed 12.33% down after its results. I have formed short strangle in Crompton Greaves, sold 110 put and 170 call. Apart from this strangle, I have also sold OTM calls. It will be quite a while before company stock will stabilize. As per new estimates, Crompton will report Rs 9 EPS for FY12. At 140, stock trades at 15.5x its FY12 per share earnings. I don’t think you will buy Crompton at 15x in this market. I mean there are better stories in  the market, trading at lower multiples than Crompton at 15 PE. Although I have sold Maruti OTM calls, but automaker is trading at lower multiples than Crompton and given a choice I would buy Maruti than Crompton.


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