ValuePickr Forum

Lessons from Corporate Misadventures - India Lessons

Lessons from Mr Market
#1

In order to maintain objectivity and clear focus on learnings, let’s seggregate Misadventures from Frauds/misdemeanors -which have a definite legal bearing.

This thread is about Misadventures only. There is another specific thread for Frauds/Misdemeanors.

High Debt with lot’s of pledging - is clearly a misadventure. which other cases come in Misadventures?

Please continue your robust participation, try to capture the essence of the misadventure in 1,2 or 3 brief paras and provide authentic/credible information source links. This is very important.

#2

Posted bySubash Nayakat Monday 17:31

KEMROCK)- High D/E ratio + High promoter share pledging + poor quarter

Kemrock Industry is involved in manufacturing of fibre reinforced composite materials. The stock used to quote in and around 500 in last 2 year. Then came July’12 and the stock started falling like a rock. Within a month it is now quoting at 110, with lower circuit hitting almost everyday.

**Why did the rock fell:-If you see theratio page of kemrock at edelweiss, you can see the exceptional growth ratio (all exceeding 30%+).**If you look closely there are few issues with it. It has a high D/E ratio of 1.69, a low promoter holding of 25%, of which around 50% of it is pledged. So it was a bomb waiting to explode.

If you see thequaterly result page, the PBT is almost flat, and the interest is slowy eating it, come Jul’12 the pizza is fully eaten by the interest. Share fell, the lender asked for more pledging, the promoter pledged another 20% of share (total share pledging is now 70%), share fell more, everyone panicked, so everyone ordered sell, and the stock slide.**
**

Lesson to be learned:

  1. Be wary of companies with high debt, always check how much percentage of PBT being eaten by Interest.
  2. Be very very fearful of companies where promoter have pledged good amount of share, as it can cause share price to fell like anything

Hi Donald,

Do let me know if I missed anything

Reference:-

  1. http://www.moneylife.in/article/kemrock-industries-shares-plummet-on-poor-results-and-pledging-of-shares/27818.html
  2. http://www.businessstandard.com/india/news/kemrock-ind-tanksweak-q1-earnings/183070/on
  3. http://www.edelweiss.in/company/Kemrock-Industries-And-Exports-Ltd.html
#3

Posted bysamir sat Monday 17:19

What I know is “There stock prices have/had been hammered heavily”

Allied Digital -> What’s interestingis the great Indian investor Sanjoy Bhatacharya had mentioned positive about this scrip at 219 in article titled “Preserve Your Capital” in May 2010.

GTL Infra -> fall of 50-60% in one day

Glodyne Technoserv --> From 400 to 70 … voila

Shree Renuka Sugars --> Certainly has ethical promoters … but scrip hasprivilegeof getting hammered by 40% in one day in 2011

AK Capital Services — Don’t know anything about it … but for last years its making continuously 52 week low:))

Sun TV and Spicejet -> Maran’s companies viewed as Lambi race ka ghoda and in bull mkt ppl will forget everything bad about it … just my guess

Mphasis

Many more I will post:))

#4

Admin,

Why u edited my AK capital comments about Big Bull’s Guru … U can see BSE shareholding pattern in 2010/2011 and u can clearly see his name … I don’t have any secret information … its publicly available :slight_smile:

#5

Posted bySubash Nayakat Monday 17:39

Glodyne Technoserv :

First generation entrepreneur without deep pocket, using debt funded root to douncontrolled global acquisitions, thereby**pledging 80%**of their share. They are green in all growth ratio, have slightly bad DE ratio of <1.

#6

Posted bysamir sat Monday 17:37

One of the biggest failure in capital good space which made severalinvestors(including BIG BULL) never loose hope even after reporting losses for several consecutive quarters … if u see thread of this cos in TED, title say its “L&T in making” … people still have confidence in this cos … Many might have already guessed this “Punj Llyod”

Disclosure: No Fraud has been identified in companies like Punj Llyod, Sun TV and all above mentioned scrips by me in this thread.

#7

Thanks Subash and Samir for your immediate and energetic contributions.

Subash - I have not studied “failures” at any length, so I will refrain from commenting:). Will ask the Market Edge experts to comment and guide us through this maze.

Samir - If you don’t provide a direct link - that’s seen as authentic and credible, Admin reserves the right to Edit/Delete. They have the responsibility of keeping this Forum “FAIR”, “CLEAN”, “ACCOUNTABLE” and most importantly “LIABILITY FREE”:). Let’s allow Admin some leeway in this:).

1 Like
#8

Posted byHitesh Patelat Monday 18:46

Most of the times the scrip is by and large having similar story with almost same ingredients

1). management pursuing relentless growth especially by the acquisition route

2). increasing debt

3). promoter pledging (or low promoter stake to begin with)

4). lots of research reports coming out with buy calls from various brokerages

here i can definitely state that companies like anant raj, adsl, deccan chronicle, even glodyne to some extent – were all at one or other time a darling of more than 2-3 brokerages at a given time.

the high debt taken for expansions has taken toll of more companies than one can count.

I guess it always makes sense to look out for companies which continue to grow without piling on excessive additional debt.

in our current universe of stocks companies like jubilant life, balkrishna inds etc fall into the category with high debt. personally i cant find anything wrong with these companies but when we have in our views other companies which can maintain growth without too much debt why bother looking at companies loaded with debt. I for sure would like to miss the multibagger ride in these kind of companies and would have no regrets at having missed the ride even in hindsight.

I know there will be lots of wry faces at mention of companies like balkrishna but for me it is better avoided.

currently these companies have( part or full) of their borrowings in foreign currencies which adds to complications already present. You never know which way currency is going to move and how it is going to hurt the company in question.

#9

Hi All,

Two Pointers here::

  1. Diversification or Diworseification : Suzlon, Renuka Sugars and a lot many cos on name of de-risking the business, backward integration have gone on acquisition spree. Most of the times it has been funded by debt and any downturn has hammered these companies

  2. Cash:: As value investors, we love companies with Cash, but in Indian context they can often lead to value trap. So before, we jump at cash we should understand is this business good enough to generate so much cash.

Regards,

CS

#10

The classic case as Hiteshji pointed out : Aban Offshore

All typical elements of disaster, management pursued a huge acquisition at the cost of very very high debt and lots ofresearch reports coming out with buy calls from various brokerages during 2007-2008.

Aban is the flagship company of the Aban Group, promoted by Mr. M. A. Abraham. The company, founded in 1986, is an offshore drilling contractor, providing oil field services for offshore exploration and production of hydrocarbons in India and abroad. It also generates power through windmills, which contribute a small portion to its revenues.

The company was established at a time when Indian entrepreneurs were encouraged to provide offshore drilling services to ONGC to meet its E&P needs. Aban launched its first contract drilling service for ONGC in 1987 with two modern jack-up drilling rigs acquired from the US. Through a series of aggressive acquisitions over the years, its fleet expanded to 21 rigs by FY09 end.

All was well till the company went for aggressive expansion. The huge debt pile it took
(D/E at Mar 2009 was 2.47) subsequently with huge capacities coming online worldwide in 2010-2011 day contarct rates for offshore dealers crashed leaving the company reeling with huge pile of assets(capacity) with no returns resulting in poor earnings and huge debt burden.

Such was the market fanatism with this stock based on huge projections of free cash coming in over 2009-2013 that on 4th Jan 2008, just before the crash Aban was trading at 5400 per share on a trailing EPS of 33 Rs with an astronomical P/E of 160.

And the subsequent crash of 2008-09 took the stock to as low as 221 on 9th March 2009. Investors in the process had lost 96% of their capital invested at the peak.

What was essentially a superb business operating at 60% EBITDA margin and ~25% net profit margin was killed by promoter’s craze with unfeasible acquisitions fuelled by Debt.

1 Like
#11

Well those people didn’t look closely enough at Punj Lloyd’s IPO draft prospectus. There was clearly a lot of past history of delays in project execution. Many penalty clauses were invoked by PSU oil co’s on past orders. And then Mr Punj did get caught up in the ‘next LNT’ hype and bought outSembcorp Engineers and Constructors (Sembcorp) in June 2006 for 114cr. The rest of course is well documented downhill journey of past 6 yrs.

Links:http://business.outlookindia.com/article.aspx?267954 Link: http://business.outlookindia.com/article.aspx?267954

http://www.thehindubusinessline.in/iw/2009/07/19/stories/2009071950390700.htm Link: http://www.thehindubusinessline.in/iw/2009/07/19/stories/2009071950390700.htm

Bottomline: It need not be a big inorganic move that can trip up a co. Might just as well be a small takeover(with big hidden contingent liabilities!) without any duediligence.

Link: …/308781136/720724502 Posted bysamir s Link: …/…/…/author/extreme at Monday 17:37

Link: …/…/…/author/extreme

severalinvestors(including

#12

Hi,

Totally agree with Hitesh on the points he has mentioned to check. Another thing which I have noticed is that such stocks have strange trading volumes and patterns - usually the trading volumes are very high. Usually I have noticed that good cos which are undervalued and undiscovered have low volumes.

Be very cautious on cos with high debt with a requirement of high working capital. We also avoid cos with low tax pay-outs.

Ayush

1 Like
#13

Overseas acquisition n that too in frenzy of bull market has been a big wealth destroyer.

Just remember Tata Steel acquisition of Corus in a frenzied bidding war withServerstal has resulted in share price even now languishing around 350 price range.while a smaller player like Bhushan whose share price was around 50 Rs in 2003 has Ben a multi bagger n that too without any captive coal or iron ore mine in unglamaorous metal sector.

Bharti is also paying for its miserable Africa foray.similarly Everest Kanto, Suzlon,Havells,Icici Bank are other cos whose international foray were nothing short of disasters.

Cos focused purely on growing Indian market have been better performer.

#14

First of all I would like to add few more names to the list

bartronics, jupiter bio, klg system, Zylog (not sure if that is a fraud)

I somewhat agree with Hitesh on the points mentioned by him.

But I think it is more question of how promoters go about the inorganic growth plans. How they source the funding. When CFOs go with non-secured or high risk funding source, they are entering the grey area according to me.

TISCO went about funding for CORUS buyout loan by not pledging but by naked across the border loan. (it was not hedged against currencyfluctuations).

Similarly some promoter got funding for buyouts by pledging their holding, which again isrecipeof high risk (failure in long run) (example here are Onmobile)

Should I say greed or high risk funding orfinancial miscalculation which lead to problems for these companies.

#15

Geodesic: decline in share price of more than 90% in the last five years.

Admin: Not sure whether its a case of fraud too. As there is confirmed newspaper report, I am posting in under this thread. But possibility of fraud cannot be ruled out completely.

Please find below some of the points I noted from various blogs and on cursory look of financials:

Case of diworsification, initial hype, products with no business model. http://forcesofindia.blogspot.in/2012/10/geodesic-scam.html [ This blog also claims that promoter pledged their shareholding with an intent to encash before the crash. They also claims that company produced results from thin air and they announce buy backs, MoUs, joint ventures that would never reach the logical conclusion]

Some extracts from TED [ http://www.theequitydesk.com/forum/forum_posts.asp?TID=502&PN=1]

Entire hype was based on their enterprise product aMundua. But many people raised questions on the business model [infact many people could not understand business model itself] and some people from the same field questioned whether itas really possible to make money and why anyone will pay to use this product.

One of the best internet minds in the VC industry is invested into this one with about 1% holding valued at Rs 10 crores. a

Some additional data points:

Consistent decline in promoter stake. From 55% in 2001 to 30% in 2004 to 20% by end of 2009. [I also noticed frequent trading activity in companies shares by insiders]

Till Sept 2011, there was no pledge of shares by promoters. In Dec-2011, they pledged 30% of their holding [by this time share price had already declined by 50% over last one year], which increased to 60% by June-2012.

Some lessons:

  1. As Prof Sanjay Bakshi says itas the aBusiness, People and pricea in that order. In this case people have bet more on management and high profile investors rather than on business fundamentals.

  2. Donat be greedy on something we don’t understandand would not understand- The speed and replacement of technological innovations]

  3. Be away from companies with low promoter stake and more so when they are eager to dilute their holding at first opportunity rather than increasing their stake.

  4. Understanding of the business model, industry dynamics and how the company make money is must.

  5. Don’t invest merely looking at ROE and ROCE. Company has consistently reported ROE of 25%+ during 2004 to 2011 [reported ROE of 30%+ during 2005 to 2009]

Contrary opinion [blogger is quite bullish on Geodesic, I do not agree with the post] : http://alphaideas.in/2013/01/25/is-geodesic-ltd-the-multibagger-you-have-been-waiting-for/