Pledging, in my limited understanding, is over-rated to some extent. The money raised by a person by pledging her shares, may/may not flow back to the company in question. This is more of an ethics question. The promoter has no legal liability to use the money into his own company. She can very well use that money to take a much awaited holiday around the world, even when her company is in distress!! But then, THIS should be the litmus test of a trustworthy promoter, shouldn’t it?
On the flip side though, why the need of pledging shares arose, is a much more relevant, and I daresay, critical question. Are there cash flow problems?(what is to say it won’t happen again?). Is it for an expansion, perhaps?(why couldn’t the company use internal accruals for that?). In most cases, the answer is not to our liking as wannabe partners in the company.
DISC: Just my 2 cents, I’m also a learning newbie which wants to be corrected.
Sir, can you help me in understanding couple of things?
They said they have pledge shares against the debt. Since they are releasing the shares their debt may come down. However, is it possible since stock price is going down lender party may ask them to pledge more shares?
There is a transaction on 1st July when promoter bought from open market, some theory says son wants to offload shares that was acquire by father. Could this be true?
They have pledge shares with money wise financial services, in the concall they also said that it is because of new order came in late March and they will have fund available by end of June either that is delayed or they are lying which might have forced them to sell. But further digging suggest they are releasing shares from tata capital finance and some church gate financial service. Is it possible that you can lend money to one service and release from others? If not, there is no disclosure on when they pledge with these parties.
Further in concall they have always avoided questions of debt and CFO failed to convince investors. Too rosy picture it seems to be true.
The promoter stake may go down to 54-55%. Got this info when I called them. So more selling is coming.
This year is going to be turbulent. Things will get bad before they get better. The WC issue is real issue and that is not going to go away because their Indian customers do not pay on time. They take up to 150 days. Unless the revenues from export go up dramatically the “chemical” biz will suffer WC problems even in the future. Can’t be helped.
Vet API biz does not have this problem. It is much better quality biz. The chemical biz cannot be termed as good quality biz at this point in time due to these cash flow challenges.
This is high risk high reward kind opportunity. The returns, if any, may not come for 2 years. Each one needs to look at his current health of portfolio and ask if he can afford to take the risk and then proceed from there. Yes I agree. This stock needs somewhat higher risk appetite.
Generally that is the case. When share price decline, the lender ask for top up. Typically, there is 50% margin lending. So you give Rs 200 worth of share to get Rs 100 of loan. Let us assume share price decline from Rs 200 (per share) to Rs 150 per share. Now, you need to replenish collateral to extent of Rs 50 to increase collateral value to Rs 200. In case, after notice borrower does not increase the collateral, the lender may liquid pledge shares in open market, which has been seen in multiple case like Treehouse, Orchid, Zyno log and what not.
No idea as I am not tracking the company closely. But given that the promoter are already leveraged (with given pledge of share of security), I just wander why they are not liquidating Loan against share pledge rather than buying share in open market. Generally, market like the companies where promoter buying shares from open market. Please look at quantum of share purchased in context to their total holding to take final call. The purchase from open market may be to boost market sentiment and price of shares so take no further call from lender emerge. This is my reading based on limited information available and would not be surprised if my opinion is in variance to factual situation.
I do not have answer about SEBI norm for disclosure of pledged share. Proabably some other member may be better place to answer this question.
Here is a classic case of greed, fear, sentiments, human behavior; theory of which we all must have read in several investing books/articles one way or the other. It all boils down to the risk appetite of one. Its difficult to take a call with 100% probability of what will happen in next one year however one should welcome volatility if you want to be part of the journey downwards or upwards. To me risk is 100% however if they come through reward is 100%+, so considering myself as a risk taker, I am willing to invest some as risk-reward is in my favor.
Discl: Invested 1% portfolio, happy to lose that and would consider it a learning fee Although I understand by doing so I am forgetting Buffet’s Rule 1 and 2
In the recent interview with ET Now, Mr. Omkar said to clock 25 Rs. EPS for FY17. Consolidated EPS for FY16 stands around 15-16 Rs. So there could be big jump in bottom line. If company can achieve this even by reducing debt than it would be very good for shareholders.
Here’s the link
For companies which are trying to move up in value chain or on high growth
path ( as said by mgmt) the EPS numbers are a sham.
The imp thing i would look in such cases is WC days and the resultant
operating cash flow.
In this case if they got a big order existing bankers would have funded had
their liquidity position been better. Raising money against shares is last
resort considering the interest rates.
Unfortunately management doesn’t speak on how they will improve cash flows
rather than EPS!!
Dhiraj:
I agree with you in principle but not in the case of Omkar. Because the share price came to 150 because promoters sold. If promoters had not sold then the price would settle somewhere near 180. And in fact if you see the history of price movement in the last 2 months then that is what you see. The price jumps up when there is break in selling only to come down again when they resume their selling in bulk.
So IMHO it may not be right to say the promoters were forced to sell by lenders because price came down. The price came down because these guys sold else price would have been near 180.
atishay1:
Not sure how you calculated 100% loss/risk for Omkar. Typically you look at what percentage you will lose from your buy price. Then You compare that figure with what percentage you may gain (from your buy price). You ideally look for 1:5 ratio. Never less than 1:3.
So just for an example… if the potential loss from your buy price point is guesstimated to be 20% by you then ideally you should demand at least 80-100% gains from the opportunity your examining.
@giridesh3
I have not invested in the company and not very keenly following due to adverse feedback about promoter. Having said that, are you too benevolent to promoter to say that they intend to keep share price low by selling? In fact, what is reason for them to take loan against pledge of share? Majority of time, loan against promoter shares (unless given to lender of the Compnay as additional collateral) has been for increasing share price. Having said that, wish you all the best for future.
@Dhiraj: Read my comments carefully. I said they sold large stake to de-pledge their shares. All that selling has caused the price to collapse. Your argument was that the lender might have liquidated the shares because the price has fallen below the threshold. I am contesting that hypothesis. All the data suggests that it is promoter’s decision to sell the shares to release the pledge. Read the multiple disclosures made by the company to BSE.
@giridesh3
In the enclosed comment, I did not find anything like quantity of pledge bieng sold. Also, my first comment on this thread was on some CFO saying that promoter selling stake to reduce debt of company. As I said I have no interest in company, but at the same time I reserve my right to put forward a point with rationale.
Further, I was curious to understand, how by selling pledged share, company debt would get reduce. That resulted in some specific queries from Modi on the thread. I have replied specifically to that points. You have been tracking company and may have better idea but my specific response was question of Me Modi. Anyway, wish you all the best with your investment.
Based on June shareholding pattern promoters were holding 56% stake in company where Mr. Omkar was holding more than 3%. Based on 18th July statement, Mr. Omkar has reduce his position in the company to close to 1% and Mr. Pravin has increase his holding from open market purchase. Total holding of promoters stands at 58%.
However, based on further notification, Mr. Omkar is getting his father’s stake at 167 Rs. and advancing his stake from 1% to 13%+. Should be good considering dynamic personality of the promoter.
and i am blank on the rationale of this acquisition at 167… its not making any sense to me … why he’s purchasing from father and not from open market… its available so cheap
If you calculate based on disclosure, Mr. Pravin and his wife will be left with close to nil shares except pledge shares. I believe the indication would be to give the realm of business into son’s hand.
Company aims to become debt free (on term loan basis) by 2020…
No Capex needed for 4 years … (new plant is already ready for utilization)
Internal Accruals being used to retire term loans…
some more pledged shares should be released in 10-15 days more…
(remaining whole pledge to be removed in 4 months (conservative 6 months))
Entire pledge was for company and not for personal use
Average cost of debt to be 8% for FY17
Lasa Labs to be listed before March 2017 possibly (Demerger)
Although I understand by doing so I am forgetting Buffet’s Rule 1 and 2 