Whats Going On in Sterling International and Sterling Biotech- Why Meltdown

Does any one have any idea why there is Melt Down in Sterling International Enterprises and Sterling Biotech Ltd.

I could only get following news on net:

1.IT Raid in June 2011

2.Case by State Bank Of Mysore

3.Case By IDBI Bank

4.Concern of paying back FCCB

But none of such concerns are having detail reports to judge the in depth crisis.

Are we going to see another debacle like Satyam Computers.

If so why Nitin and Chetan Sandesara is not coming out to clarify or else if they have done something wrong why not our regulatory bodies like SEBI, Stock Exchanges, Govt trying to bring clarity to investors who has put their hard earned money in these two comapnies.


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Disclosure: Long Sterling Biotech

In addition to the 4 points mentioned above,

)- Cholamandalam Finance offloaded approximately 1cr shares in Oct/Nov at 10 levels. These were picked up by 5 market operators who, in absence of management comments, are managing the price of Sterling Biotech. The stock has support at 9-10 levels but fails to cross 10.05.

Surprisingly, there is significant delivery offtake (61% for the last few weeks).

)- The company jet has also been reportedly impounded

)- The State Bank of Mysore case is against the promoters ie personal loans. The IDBI case is against the company. Both cases have not progressed into litigation yet.

Sterling Biotech is like a deep OTM call option currently.

)- They are one of the largest manufacturers of gelatin globally (7% global market share). They structurally enjoy a competitive cost advantage as raw material are bovine bones (cheap in India). Gelatin products are used in the pharma industry (most capsules) and the food industry. The business is stable, generating about 6-8% operating margins.

)- They are 33.4% owned by the promoters (the Sandesara group); 55% of these shares are pledged to financial institutions. Recent news in the press re: defaulting a Rs50Cr loan from Andhra bank and impounding of the company jet (unconfirmed).

)- The company issued multiple rounds of FCCBs between 2004 and 2007. The second last tranche of $140mm was redeemed at par and cancelled in 2010. They have $170mm of FCCBs due for repayment on 16 May 2012 issued at a conversion price of Rs200. Given where the stock was in the last 6 months, there was no way this is going to convert into shares.

)- The debt is carried on Sterling Biotech’s balance sheet (Rs3700Cr) and the interest payment is far greater than their operating profits so they are running net losses. The official story was they wanted to increase capacity on their biotech business, reflected in capex over the last 2 years (~$270mm). The money was invested into the SEZ (Rs1700Cr) and the Nigeria oil business (numbers unavailable) via shadow companies. These are on the 2010 annual

report as unsecured loans to group companies

In it’s current form, the company cannot pay the FCCB due in May and is technically bankrupt. The bonds are trading at 50 cents on the dollar (listed in Singapore). With lack of any intention from the management and the plegded shares overhang, the shares have gone in freefall and is a classic operator driven story now (alternating upper and lower circuits for 10% moves) with support at Rs 9 levels.

Why this is interesting:

)- There is economic incentive from the promoters to keep this company afloat ie it is a liquidity issue, not a solvency issue.

)- The money was invested and is locked in Nigeria and the SEZ and the promoters are most likely struggling to get it out. The oil well was supposed to produce 100K barrels per day by now; current output is only a fraction of that estimate.

)- Even if they refuse to bail out the company and we head to default, there are no bankruptcy laws in India ie a bond default will most likely go to court (ala Wockhardt). If it does, PPE as of Dec’11 alone was $918mm so technically the bonds are backed by assets but trading below par to reflect the difficulty of recovering this in India via a bankruptcy proceeding. The book value per share is about Rs98 and the underlying business is stable enough to be sold in whole to a US/EU player. In this situation, the bond holders get paid at par and equity holders get the remaining piece of the pie

Now if they do manage to scrape the money and pay off the bonds, both the stock and the bonds go up - bonds from one cent to the dollar and the stock from 10 to 50 (atleast 0.5x book value of 98).

In addition to all of the above, there are softer issues in play ie the repayment of the 2010 FCCB in full and reduction of pledged shares from 98% to 55%. If the intention of promoters were to default ie. siphon the money out of the company, these actions are contradictory.

This is a high risk trade - close to 90% capital loss vs 400% upside so trade this position like you would buying call options.

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Errata: The bonds are at 50c on the dollar so they go from 50c to 1$ (typo in the third last para as one cent)


FII/DII sells:

)- Cholamandalam Finance 43lakh shares at 11.27

)- Daiwa Cap Markets 18lakh @ 13.65, picked up by Avatar India opportunities fund.

)- Frequent transactors (= operators ?) are BP Fintrade, Ashwin Stocks & Investments, Destimoney, Multiplier Sharebroking and Vora Financial Services

Thanx Mr.Raja, appreciate your reply.

Seeing the performance of 2 listed companies we are seeing Sterling International Enterprises has been hurt heavily. Which as per Annual Report ending June 2010 Company`s consolidated Balance sheet shows 812 Cr as bank balane/Fixed deposit and loan of only 217.5 cr. Company also entered into sale contract of Oil with VITOL which is been confirmed by VITOL website news.

Whats happening on this counter why this stock came down from 200+ in Dec2011 to Rs.6.9 today.

All your informations above does`nt satisfy my query “Why this meltdown”

I am smelling a story may be like Satyam Computers where total books of accounts were fabricated.

Any friend know anything pls come out. It can be a great story of investment at an unusual time.


Disc.: Dont have any investment in the group companies.

The market was sliding down and the CRISIL FCCB report came out. This was the same time Wockhardt and Zenith announced their intention to default on FCCBs and RCom was struggling to refinance it’s $1bn FCCB.

As to why Sterling Bio came down to 10, and not, say, 5 is a good question the stock came on my radar after the hammering. I’m afraid I’ve not looked at Sterling International in great detail.

Would appreciate fellow views, especially if this is a suspected accounting fiasco.

I beleive in this tough time of Europian Crisis …FCCB rollover is a general issue with most of the comapnies took FCCB and i am sure this can not be the reason of melt down.

Also have seen sell off triggered by operators or financiers on payment default gives normally “V” shape recovery again and again after sell offs till fundamentals are intact.

Hi Mr.Janakiraman,

Thanx for your input. Now picture getting clearer in my mind and seems its repeat of Zenith Infotech. I further believe many more such repeation

we will be seeing in coming future till 2013.

Thanx and regards.

I had once looked at Sterling Biotech (no idea about the group company) when my then firm was looking to make an investment in the Co’s FCCB’s. We passed due to promoter level concerns and high indebtedness

I think Raja’s post summarizes the situation very well. The Co’s core business is sound and has a decent growth opportunity as well. The concern is i) promoters and ii) debt levels which are now prized in. Ultimately this will go through the BIFR route and there could be substantial upside if bond holders are able to sell the core unit. However, i am not a fan of investing in bankruptcy cases in the indian context due to the legal hurdles in realization particularly where the promoters are suspect.

The stock has now become (it sort of always was) a punter stock so there are even more reasons to stay away atleast untill more clarity emerges on how the bankruptcy situation is going to play out. Else, it remains as Raja said a deep out of the money call option.

Disclosure: 90% of long positions cut (luckily at cost so portfolio collateral damage was nil, ex trading costs).

Sterling biotech has officially defaulted, the biggest ever FCCB default till date by an Indian company. The stock hasn’t moved much (-3% today) and is still had 60% delivery offtake which is perplexing me.


They proposed a ridiculous restructuring (2 year moratorium) citing pricing pressures from Chinese exports and even booked an operating loss in the March quarter. Globally gelatin capacities are not coming online and US prices are up in the range of 15-25%. And the company is sitting on huge raw material compared to 3Q12 (why would one buy inventory when the Chinese are crashing prices ? The figures appear cooked up but then, I was looking to trade this despite the evident corporate governance issues.

There still exists an economic incentive for the promoters to save the company ie it is a liquidity issue not a solvency issue (assets > liabilities so the equity has value) but this will go the BIFR/lawsuit route now. 55% of promoter shares are pledged which might hit the market if the share price goes into freefall.

If anyone is considering a trade, you should get ample opportunities to pick this up, probably at 5-6 levels. The company’s saleable assets are outside India so USD-INR pressures will continue to drag shares down, on top of whether the assets can be fire sold in the current global economic backdrop.

Timelines can be hazy as Wockhardt’s case dragged on for a few months.

Hi, Raja How r u?

I think you are most informed and well resourced person. pls tell whats happening now in the group, can we say both group company sterling Biotech and sterling international enterprises after falling 90 and 99% are gone case. Sterling International stopped falling now and started upper freeze.at 3.15.


Hi Sajan,

I believe the AGM held on Jun 28th didn’t address any issues re: FCCB repayment or restructuring. I believe it appeared to be a choreographed event (per reports from people on moneycontrol who attended the AGM).

As it stands, both stocks are on upper circuit for the last 2 days but I wouldn’t buy into them now as there is no clarity from bondholders. If the FCCB issue is addressed satisfactorily, you probably will be able to buy Sterling bio when trading freely resumes (ie circuit locks passed); I expect this to be the 25 levels. Then the next stop could be in the high 30s.

Unless you are already invested, I would stay away till the market finds an equilibrium price post FCCB resolution as constant upper/lower circuits give you no chance to exit. My rationale for a trade before May 18th was a binary view on the FCCB ie the stock rallies if they manage to pay up.

IMHO PI ind is also suffering as their upcoming plant was located on this SEZ which wud be invariably delayed

Hi Janaki,

Whats happening in Sandesara Group, after all i am very sure Sandesara Sahab must be a man of around 10000-20000 Cr. whatever had been to the general share/bond holders of the groupd company, Sandesara sahab ki to mauz hi hogi…after all hamare yahan itane regulatories jo hain hum sab ka khyal rakhne wale…ha ha ha ha…whats yr views…


Hi Sajan AKA Jerry

I haven’t been tracking Sterling Bio closely since I exited my position. From what I know, there is no change in the situation ie. FCCBs remain defaulted, no court proceedings have been initiated and the prior ones against the company/management are in limbo ie. havent progressed to litigation yet.

The dip to 5 happened and the stock has held those levels but you have to be really brave to trade this in anticipation of the FCCB resolution.

As disclosed in my last post, I hold 0.1% of my portfolio in this stock, out of sheer intellectual curiosity regarding the endgame for Sterling Biotech.

Hi Raja,

Do you have any updates on sterling bio and international ?

Both scrips have rallied tremendously since the announcement of FCCB resolution on 20th Nov and all research suggests the Sandesara group is set for a v shaped recovery. A few months ago Sterling International also announced a deal to supply crude to Glencore which gives rise to some speculation on the possibility of a future stake sale to ONGC.

All news seems to have been very meticulously planned for a recovery of soerts

It looks like your sheer curiosity may pay you handsomely !

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