Vous êtes sur la page 1sur 28

Lessons in greed

How to sidestep futrue Satyam, Sahara and NSEL scams by


spotting the alarm signals

Vol. XXIX/02

Mar 17 30, 2014


www.capitalmarket.com
......................................................................................................................................
Owner
: Capital Market Publishers India Pvt. Ltd.
......................................................................................................................................
Managing Director
: S. Anantharaman
......................................................................................................................................
Jt Managing Director
: Ruby Anand
......................................................................................................................................
Editor
: Mohan Sule
......................................................................................................................................
Deputy Editor
: Yagnesh Thakkar
......................................................................................................................................
Assistant Editor
: Sameer Purohit
......................................................................................................................................
REGISTERED OFFICE
401, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai-400 071.
Tel: 91-022-2522-9720 Fax: 91-022-2522-0954 / 2523-0011.
email: info@capitalmarket.com
CAPITALINE DATABASES
Tel: 91-022-2522-1112 / 2522-9720 Fax: 91-022-2522-0954 / 2523-0011
email: info@capitaline.com
ADVERTISING
Tel: 91-022-2102-8388/ 2522-9720 Fax: 91-022-2102-4366 / 2522-0954
email: advt@capitalmarket.com
SUBSCRIPTION & DISTRIBUTION
Tel: 91-022-2102 3869 / 5472 Fax: 91-022-2102-4366
email: subscription@capitalmarket.com
AHMEDABAD
312, Sampada Complex, 3rd flr., Rashmi Society, Mithakhali,
Six-Road Junction, Navrangpura, Ahmedabad-380 009.
Tel: 079-2642 1534 / 35, 2656 4727 Fax: 079-2642 1535.
email: cm-ahmd@capitalmarket.com
BANGALORE
No.37, 2nd Floor, Dickenson Road, Bangalore-560 042.
Tel: 080-2557-2334 / 5 Fax: 080-4151-0674.
email: cm-bglr@capitalmarket.com
CHENNAI
No.41, 1 st Flr, Sundareshwarar Street, Mylapore Chennai-600004.
Tel: 044-246-12690 / 38, 249-51900 / 01 / 02 Fax: 044-2461-2638
email: cm-chennai@capitalmarket.com
COCHIN
Oriental Business Centre, 36/1262 A, Vaidyar Lane,
Kaloor, Cochin-682 017. Tel: 0484-325 3420
email: cm-cochin@capitalmarket.com
DELHI
601, 6th Floor, Padma Tower - II, 22, Rajendra Place,
New Delhi - 110 008. Tel: 011 - 2581-1255 / 56 / 57
email: cm-delhi@capitalmarket.com
HYDERABAD
# 3-5-890, Room No-209, Paras Chambers, Himayatnagar,
Hyderabad-500 029.
Tel: 040-2326 4384, 32408398. Fax: 040-4007-7098.
email: cm-hyd@capitalmarket.com
KOLKATA
3A, Shivam building, 3rd Floor, 46E, Rafi Ahmed Kidwai Road,
Kolkata-700 016. Tel: 033-329 66683. Fax: 033-2227-3120
email: cm-kolkata@capitalmarket.com
PUNE
C-28, 1st Flr, Shrinath Plaza, Plot no. 559, Bhamburda, Shivaji Nagar,
Fergusson College Road, Pune-411 005. Tel: 020-2551-1616 / 17.
email: cm-pune@capitalmarket.com
......................................................................................................................................
Cover Price: Rs 50
Annual Subscription (26 issues): India Rs 1,300
Overseas (Airmail) US$ 140. (Cheque/D.D. drawn on Mumbai
in favour of Capital Market Publishers India Pvt. Ltd.)
2013 Capital Market Publishers India Pvt. Ltd.
All rights reserved. Reproduction in whole or in part without
permission is prohibited.
All possible efforts have been made to present factually correct
data. However, the publication is not responsible, if, despite this,
errors may have crept in inadvertently or through oversight.
Though all care is taken in arriving at the recommendations
given in this publication, readers are cautioned that prices of
equity shares and debentures may rise or fall in a manner not
foreseen. Readers are advised to take professional advice
before investing.
Subject only to Mumbai jurisdiction
......................................................................................................................................
Printed and published by S. Anantharaman on behalf of Capital
Market Publishers India Pvt. Ltd. Printed at Magna Graphics (I) Ltd
Kandivili (W), Mumbai - 400 067 and published from 401, Swastik
Chambers, Umarshi Bappa Chowk, Sion-Trombay Road, Chembur,
Mumbai 400 071.

Mar 17 30, 2014

CAPITAL MARKET

After a 32-month prison stint by erstwhile Satyam Computer Services founder


Ramalinga Raju, Sahara group managing worker Subrata Roy became the second highprofile company boss to spend time in confinement. Raju confessed of fudging figures, while Roys dodgy fund-raising was detected by the Securities and Exchange
Board of India. Even as Jignesh Shah was being painted as a David taking on Goliath
Sebi for its refusal to grant MCX permission to start an equity exchange due to
reluctance to dilute promoter shareholding to 5%, the blow to the FTIL group was
struck by the finance ministry, which issued showcase notice to subsidiary NSEL for
launching forward contracts and vested powers with the Forward Markets Commission to investigate the spot commodity exchange. The dogged determination of Sebi
and Roys greed the open-ended optionally fully convertible debenture issue of
two group companies had invited the ire of the income tax department, as per the
disclosure in the red herring prospectus of associate company Sahara Prime City and,
earlier, the Reserve Bank of India had directed an NBFC in the group to return
deposits for undertaking para banking activities have led to the unraveling of a
diversified empire, reportedly with Rs 60000 crore of revenue. There are many lessons to be learned from these three debacles.
The first is that there is a vast rural market waiting to be tapped. Saharas real
estate and housing finance arms are believed to have raised more than Rs 20000 crore
from OFCDs. Collection of even one-fourth of this amount, if not fictitious, is a
stinging indictment of the inability of banks, mutual funds and NBFCs to reach out to
the informal sector, leaving the field open to loosely regulated residuary NBFCs and
chit funds. Perhaps small-ticket investments do not justify the cost of penetration for
institutions in the organised sector, governed by stringent norms on capital adequacy.
As a result, the financial services sector has not succeeded in tapping the entrepreneurial spirit of those with no capital or degrees but possess a missionary zeal. The
focus of financial inclusion is on lending to the priority sector and weaker sections,
but not on the liability side. The Sahara boss initially tried selling packaged snacks but
discovered that the small savers were easy to attract than small consumers. The
episode also shines a light on the lack of awareness in non-urban regions of the riskreward equation and the importance of know-your-client norms.
Besides monitoring the resource-mopping exercise, scrutinising the end-use of the
money is important. There is need for lowering the ceiling for accepting cash deposits
to the earlier Rs 10000 from the current Rs 50000. Unlisted companies escape Sebi
purview if their subscribers do not cross 50. As the Sahara saga of mysterious investors reveals, huge amounts can be collected from even a handful of subscribers eager to
park their unaccounted wealth. Instead of volume, the threshold for Sebi and the
RBIs intervention should be linked to the value of subscription. This could be a
multiple of the companys capital. The Department of Company Affairs should be
divested of its powers to regulate unlisted companies. Even auditors and credit rating
agencies, in the crossfire for conflict of interest, can no longer be relied to be the
keepers of investors trust. Autonomous monitors to supervise unlisted and micro
firms market forays could address the anxiety on transparency. For investors, any
tussle with regulators should raise an alarm. For instance, the FTIL group got
permission to start MCX-SX after a legal battle with Sebi. High growth of companies operating in a shallow market should be another red flag. The contribution of
NSEL to the bottom line of the provider of trading software was increasing over the
past few years. Proximity of corporate honchos to the powerful works both ways:
companies can secure the necessary approvals and contracts and politicians get a
conduit to launder their commission. Roy was photographed with the whos who of
Bollywood and sports and Rajus rise was touted as the showcase of Andhra
Pradeshs prowess as a tech destination to rival Bangalore. However, the market
knows best. Stayams discounting was always lower than that enjoyed by other
tier 1 tech firms. Diversification into unrelated fields should also cause unease. It
was Satyams foray into real estate that cracked open the accounting scam. A striking feature of the three biggest scams in post-reforms India is that the protagonists
are promoters and not soft targets like brokers. An applause-worthy performance
by the finance ministry and Sebi.
MOHAN M SULE
3

ReadersReact

Pulling the strings


Indian policy makers have
taken efforts to support the
rupee (Stocks: Down but not
out, Feb 17 - Mar 02, 2014).
However, a glance at the
foreign institutional investor
inflow and outflow makes it
fairly clear that it is their
dollars that is making the
mighty elephant dance.
Nagendra Uchil, via e-mail

The economy could remain in


doldrums sans a stable and
strong government at the Centre
post general election in AprilMay 2014. The Lok Sabha polls
is one big factor that the market
is watching. Any disappointment on government-formation
could dash optimism about
economic recovery.
Bhartendra Gambhir, via e-mail

High inflation is eating into


consumption demand. Inflation
in India is the highest among
emerging economies and, thus,
really a cause for concern.
S Gokak, via e-mail

Thanks to the spate of scams


over the last few years, the
confidence in the process of
policy making has eroded

significantly. The list of charges


of corruption is too long The
major ones include allocation of
telecommunication spectrum
and coal blocks. There are
many others at the state level.

recovery. Central banks in


these countries will have to
keep their interest rates high to
remain competitive against US
investment options.

Sampath Tirumale, via e-mail

If there is a single word that can


appropriately describe the
present state of affairs in the
Indian market, it is uncertainty.

The inability of politicians to


reach a common ground is
stalling growth in rich
countries as well as developing
ones like India.

N Magotra, via e-mail

Vineet Wagle, via e-mail

Divergence and convergence


In the second half of 2013, it did
appear that the developed world
and the emerging markets were
decoupled (Editorial: Lesson
from India, Feb 17 - Mar 02,
2014). The focus of central
banks in the US, Europe and
Japan was to wake up inflation.
In contrast, emerging markets
were grappling with burgeoning
current account deficit, depreciating currencies despite interest
rates higher than in the West, and
surging consumer prices, pushing
the aam aadmi to take to streets
in Brazil and India.

Despite consensus that a


booming manufacturing
vertical is essential to provide
jobs, companies in this sector
are allowed to turn sick and
ask to turn themselves upside
down to return to health. But
too-big-to-fail financial
institutions are prepared for
another round of capital
infusion to clean up their
balance sheets.

Eshaan C, via e-mail

The common thread tying up


the rich world and developing
nations appears to be the
frothy equity markets due to
the cheap money in circulation. The second is corruption.
Crony capitalism is haunting
not only India but also
Communist China and oneman-ruled Russia.
Anil Kingar, via e-mail

An important component of
the last season of buoyancy
was cheap money in search of
yields. With its likely absence,
the debatable question is if the
emerging markets will be able
to ride on the American

Enjoy free Telefolio Service


till election results are declared!
Check out for details at
http://www.telefolio.com
For details see page 85

B K Nath, via e-mail

Kavita Nagvekar, via e-mail

The onus of reviving the


economy has now fallen on
central banks, which can only
make money costly or cheap
as governments with powers
to formulate sensible policies
have abdicated their responsibility in favour of racking up
fiscal deficits.
Rohit Mukhopadhyay, via e-mail

Lack of depth
The outlook for
emerging
markets such as
India seems
hazy if one
considers the
fact that India is
a shallow market and a few
billion dollars can move the
market either way (The markets:
Dazed and confused, Feb 17 Mar 02, 2014). Any significant

Capitaline is an analysts delight, yet


easy to be trained upon. Even web
pages can be called inside the
application.
For details contact
91-022-25229720

outflow of dollars could cause


havoc on the street despite
seemingly conformable foreign
exchange reserves
Kaustubh Sahai, via e-mail

Liquidity will remain the prime


concern for the global equity
markets However, the impact
will vary depending on the
movement of the currency
market, a countrys foreign
reserves, current account deficit,
and trade deficit. Countryspecific factors also will have a
significant influence on the
economies and, in turn, on
market and investor sentiments.
Lomash J, via e-mail

The Dow Jones recording a


historic high and showing
resilience defy logic. The surge
in US stocks is not based on
the countrys economic health
but has been triggered by the
easy-money policy adopted
by the Fed. The rally in the
developed world is also
subject to the liquidity taps
being kept wide open.
Suraj Agnihotri, via e-mail

Questioning volatility
There are problems with beta as
a tool (Preparing for volatility:
Shaken and stirred, Feb 17 Mar 02, 2014). Beta is a plain
number that only reveals how
much volatile a stock is in
comparison with the market. It
does not give any indication
about the valuation of a stock.
Also, it provides no indication
about the direction of the market.
Further, the beta value of a
company could vary based on
the benchmark or based on the
duration taken into consideration
for calculating beta.
Ashwin Dalal, via e-mail

Capitaline CSS database gives


extensive data on Commodities,
Sectors and the related Stocks.
For details contact
91-022-25229720

Mar 17 - 30, 2014 CAPITAL MARKET

Inside
12 | In Focus

07 | Cover Story

Restructuring
Losing weight
Auto Ancillaries
Cash crunch
Benchmarks
Tale of two exchanges
Developed markets v emerging
markets
Problems v results
Momentum stocks
Stepping on the gas

28 | IPO Centre
Loha Ispaat
Working capital-intensive

Stocks: Sentiment boosters


The gloom surrounding small- and mid-cap stocks seems excessively pessimistic as
some of them have issued bonus shares on a consistent basis

69 | Market Watch

89 | Commodity Watch

71 | Economy

Black Pepper
Output down, prices flare up

72 | Off Focus

90 | Capitaline Corner

Japanese food
Whats cooking?

JMC Projects (India)


Aiming to boost the bottom line

74 | Apna Money

29 | Stock Alert
Orchid Chemicals and
Pharmaceuticals
In the woods

68 | Stock Watch
National Building Construction
Corporation
On a strong foundation

Addition v alterations
Oneoff presence
Swinging fortunes
Are preference shares good posttax option?
What care should be taken while
using a portfolio manager?

32 | Corporate Scoreboard
61 | Consolidated Scoreboard
62 | Company Index
66 | Bulletin
67 | Watch List

Track stocks real-time on

IPO Ratings

www.capitalmarket.com

You can get all IPO ratings on our website.


Due to short lead times, we are not able to
carry some of the IPO ratings in the
fortnightly magazine. But our web site will
give the ratings of every IPO on the day it
opens for subscription.

Hot Pursuit captures market action tick by tick

EVERYDAY!

FREE

Sample some of the captions of 12th Mach 2014:

FREE

Autoline Industries drops on equity dilution worries (12-Mar, 12:06 Hrs IST) More

Keep Your Portfolio Online

Godrej Consumer Products gains on bargain hunting (12-Mar, 11:55 Hrs IST) More

Several investors maintain their portfolios


online at our site. Premium services
(ApnaMoney) include alerts on all corporate
actions like board meetings, dividends etc.
Also ready output statements segregating
short-term and long-term gains.

Vardhman Textiles gains as PE fund hikes stake (12-Mar, 11:12 Hrs IST) More
Eicher Motors falls ex-dividend (12-Mar, 10:29 Hrs IST) More
IDFC drops on profit booking (12-Mar, 09:23 Hrs IST) More

Mar 17 30, 2014 CAPITAL MARKET

FREE

CoverStory
CoverStory

Stocks

Stocks

Sentiment boosters
The gloom surrounding small- and mid-cap stocks seems excessively pessimistic
as some of them have issued bonus shares on a consistent basis
The Indian economy had a dream run, with
its gross domestic product (GDP) growing
by over 9% in three consequent fiscal years
ending March 2006 (FY 2006), FY 2007 and
FY 2008. The growth witnessed a sudden
blip in FY 2009 owing to the global financial crisis triggered by the debacle in the US
mortgage market.
Subsequently, the domestic economy
recovered to report growth of 8.6% in FY
2010 and 8.9% in FY 2011. Though this
recovery looks laudable, economic
sentiments hardly improved during this
period and continue to remain weak till date.
Later, economic growth slowed to
6.7% in FY 2012 and further to a mere
4.5% in FY 2013, a decade-low for a once
high-flying economy. The current fiscal is
expected to be challenging as well with
the Central Statistics Office (CSO)
predicting growth of 4.9%. The future
looks hazy for the economy unless a stable
and decisive government takes over the
reins of power post general elections to
be held in May 2014.
The National Council of Applied
Economic Research expects economic
growth to accelerate to 5.6% in FY 2015.
Rating agency Crisil has predicted growth of
6% for FY 2015 with a few positive
Mar 17 30, 2014 CAPITAL MARKET

assumptions such as continuation of


economic reform process, implementation of
stalled projects, normal monsoon, and
recovery in industry. On the downside, it said
economic growth could remain below 5%.
The reform process has come to a
grinding halt over the last five years. Indeed,
the United Progressive Alliance (UPA) II
has emerged as the worst government in
terms of legislative business. The present
government managed to clear only 165 bills
excluding the last session as against the
average of 317 bills passed by other fullterm governments in the past, according to
PRS Legislative. The UPA II government
has been hit by several scams. This has
marred the decision-making abilities of the
government. Moreover, the uncertain policy
environment has had a chilling effect on the
investment climate.
The struggling state of the
manufacturing sector is hurting as the
country is not playing to its strengths. Policy
makers seem to be making fun of the
manufacturing sector. Recent comments by
the finance minister on the governments
intentions towards the manufacturing sector
while presenting the interim budget in midFebruary 2014 were hilarious. The finance
minister said the National Manufacturing

Policy has set the goal of increasing the


share of manufacturing in GDP to 25% and
to create 100 million jobs over a decade.
This is nothing but day-dreaming. In the
light of policy paralysis and lack of vision
and strategy in place, the manufacturing
sector will remain in doldrums.
As a matter of fact, the share of
manufacturing to Indias GDP is on a decline
on a continual basis. The manufacturing
sector contributed 15.2% to GDP in FY 2013
compared with 15.7% in FY 2012. This is
expected to decline further in FY 2014. This
is the period when the governments big talk
about manufacturing remained on paper. As
a matter of fact, the manufacturing sector
crawled by 1.9% in FY 2013 as against 2.7%
in FY 2012 and 9.7% in FY 2011. This is
worst performance considering the last eight
years. In short, the government needs to get
its act together and respond to global and
domestic market dynamics.
The direct causality of the economic
slowdown is the small- and medium-size
enterprises. Such companies have small
balance sheets. Moreover, if the promoters
lack financial muscle, the economic
slowdown could put such companies in a
difficult spot. Besides, if the promoters are
first-generation entrepreneurs, the matter
7

CoverStory
could become even grave. Forget about
growth, survival is their first priority in
times of economic slowdown. A couple of
difficult years could erode their net worth
and make them vulnerable.
No wonder, the S&P BSE Small-Cap
and the S&P BSE Mid-Cap index continue
to remain floored despite the fact that the
S&P BSE Sensex, which represents largecap stocks, is reporting all-time highs in
recent times. The Sensex reported a high of
22023.98 in March 2014. It continues to
remain at striking distance of its historic
peak. The Mid-Cap index is a good 3,700
points away from its all-time high of 10,113
reported in January 2008. Similar is the story
with the Small-Cap index, which is down
over 7,600 points from its all-time peak in
January 2008.
The Mid-Cap index is down 37% from
its historic high and the Small-Cap index
54%. Clearly, these two important segments,
the favorites of the small individual investors,
are severely bleeding on the trading floor.
In terms of valuation, it is the Mid-Cap
index that has taken the maximum hit. In
January 2008, when equities across the
board were bubbling with enthusiasm, the
Mid-Cap index was commanding a price
to book value (P/BV) ratio of six times.
This has now come down a mere 0.72

Stocks

Navneet has issued bonus shares thrice

times. In case of the Sensex, the P/BV


declined from 6.88 times to 2.48 in this
period. The Small-Cap indexs P/BV
slipped from 2.1 times to 1.06 times.
Considering the price to earning (P/E)
multiple, the Mid-Cap index has collapsed
to single digit of 7.6 from 28 reported in
January 2008. The Sensex is currently
commanding P/E of 17 compared with 28.3
times in January 2008. A crucial point is that
the Sensex and the Mid-cap index were
almost at par in January 2008, with identical

Feel-good action
Bonus issues do not create any wealth but they send out positive vibes
In bonus issues, reserves become part
of the equity capital. It is also termed as
the reserves moving one line above.
Thus, this corporate action does not
have any impact on ratios such as return
on equity.
Bonus and stock-split is similar in
many ways. For instance, for bonus
issue in the ratio of 1:1 and stock-split
from face value of Rs 10 to Rs 5, the
stock price is adjusted and reduced by
half once the counter goes ex-bonus or
ex-split. The basic principle is the
market value of an enterprise remains
the same and is not going to change
overnight just because a firm has opted
for bonus or stock-split. The adjusted
price for ex-bonus stock can be
calculated as market capitalisation
divided by new outstanding shares.
A bonus issue turns a stock
affordable and, hence, attracts more

investors. The liquidity profile


improves post bonus. In reality, bonus
issues do not create any wealth but they
send out lots of positive vibes. In India,
in particular, bonus issues grab the
attention of small and retail investors
There is one critical difference
between a bonus and stock-split. In
bonus issues, the face value remains
the same unlike in a stock-split, where
the face value is reduced. In the long
term, if a company manages to
maintain the dividend ratio, the
dividend amount in the hands of the
shareholders improves significantly.
Generally, companies issuing bonus
shares mind this fact while determining
the ratio. Companies make an attempt
to keep the dividend rate intact on
expanded capital. Therefore, bonus
issues can create shareholders wealth
over the medium to long term.


P/E of around 28. Both were commanding


P/BV of 6 and above.
At this juncture, the Mid-Cap index is
nowhere close to the large-cap index in
terms of business optimism, which
sufficiently reflects in valuations. A higher
P/E is a strong indicator of robust expected
future growth. This is the reason investors
are ready to offer top dollar for a stock.
In this scenario of economic grim and
fragile optimism, there is a hope of
emergence of an industry-friendly
government a few months down the line.
The optimism largely emerges from the
strong anti-incumbency wave that could
result in poll debacle for the UPA II. A stable
government with strong reforms agenda
could be one positive and near-term trigger
for the market. It could help economic
revival and boost business sentiments.
In turn, this could offer opportunities to
companies to repair their balance sheets and
reenergize their businesses. However,
investors should mind the fact that election is
just a short- to medium-term trigger. It carries
event risk. Nonetheless, it should not stop
investors from looking at the bigger picture.
Whether it is India or China or any other
reasonably big-sized emerging market, they
are going to deliver superior growth over
the long term. There should not be two ways
about it. There is little hope from the
saturated developed markets that are largely
expected to crawl with flat-to-marginal
growth or even de-growth.
India at present is the eleventh largest
economy in the world and expected to
steadily improve its position over the next
three decades to the third position after the
US and China in terms of nominal GDP. This
means immense business opportunities for
businesses to flourish.
In this context, the present gloom
surrounding the mid- and small-cap
companies seems excessive pessimism. No
doubt, there are plenty of serious issues that
have plagued these two segments.
However, there is no dearth of good quality
small- and mid-cap companies. The present
bearish sentiments towards these segments
could be actually an opportunity to explore
them for investment.
Small- and mid-cap stocks require a
strong economic revival that could bring
back luster to their businesses and help them
bounce back. This, in turn, depends on the
interest rate cycle. Interest rates needs to
moderate to aid economic revival.
Mar 17 30, 2014 CAPITAL MARKET

CoverStory
Capital Market has attempted to cherrypick quality small- and mid-cap stocks for
investors to explore. Out here, the simple
criterion of bonus issue was deployed. That
is, only those small- and mid-cap companies
to have issued bonus shares on two or more
occasions over the last two decades, that is,
since 1994, were selected as a first step.
Small and mid caps are defined as those with
market capitalization below Rs 10000 crore.
After arriving at such companies with
multiple bonus issues, their current financial
position was evaluated.
Multiple financial filters were deployed
to ensure that only companies with robust
financials emerged in the short-list. The
track record in terms of profitability and
dividend was screened. Additionally,
companies with strong balance sheet with
moderate quantum of debt were selected.
This way, there were 20 companies.
In a big move, Thomas Cook India
(TCI) acquired Sterling Holiday Resorts in
February 2014 and now is in the process of
merging Sterling with itself. Based on the
equity investments and merger ratios, the
aggregate value of the two companies is
approximately Rs 3000 crore. Incorporated
in 1986, the pioneer in vacation ownership
has a network of 19 resorts, with 1,512 rooms.
New resorts are planned at 15 additional sites.
Present in India since 1881, the leading
travel and travel-related financial services
company offers services such as foreign
exchange; corporate travel; meetings,
incentives, conferencing, exhibitions;
leisure travel; insurance; and visa and
passport services. Footprint extends to over
242 locations in 99 cities across India,
Mauritius and Sri Lanka. The network is
supported by 134 partners and 165 preferred
sales agents in over 150 cities. Owned by
Fairfax Financial Holdings, a Toronto-based
financial services holding company, with
presence in insurance and reinsurance with
portfolio of assets in excess of $30 billion,
Bonus shares were issued on six occasions
between FY 1987 and FY 2000. Bonus
shares form 65% of the equity capital.
Navneet Education is another company
with a strong history of bonus issues. Since
its public issue in 1994, shareholders have
been enriched with three bonus shares, the
latest being in FY 2009. The bonus component
is as high as 86% to the total equity capital.
Formerly known as Navneet
Publications, the publisher of educational,
children and general books and scholastic
Mar 17 30, 2014 CAPITAL MARKET

Stocks

Berger Paints has a record of bonus and dividends

paper also makes non-paper stationery


products. Started in 1959 by the Gala family,
key brands include Navneet, Vikas, Gala,
FfUuNn and Boss. The dominant player in
publishing has more than 5,000 titles in
English, Gujarati, Hindi, Marathi, Tamil,
Urdu and other Indian and foreign languages.
The portfolio of educational-based
books includes supplementary books such
as digests (guide), workbooks, and 21 Most
Likely Question sets. Most are published in
five languages: English, Gujarati, Hindi,
Marathi, and Urdu. With a dominant market
share of about 65% in western India, titles
include children and general books
categories not based on syllabus such as
coloring and activity books, board books,
story books, and books on health and
hygiene, art and artist, cooking, mehendi,
and embroidery.
Hi-Tech Gears had issued bonus shares
in a the ratio of 1:1 in FY 2000, FY 2005 and
FY 2010. Invariably, investors have been
receiving a pleasant surprise at the end of five
years. No surprise, 87.5% of the equity capital
is from bonus issues. There is a remarkable
consistency in payment of dividends over the
past decade, with median of 27.5%.
This diverse client base across the world
for engine and transmission components
includes Hero, Cummins, Daimler, Tata,
Caterpillar, Bosch, TAFE, Honda, Escorts,
Mahindra & Mahindra, Wabco, AMW,
Piaggio, New Holland, and Pentair.
Incorporated in 1985, the public limited
company is probably going through the
worst phase of slowdown in the automobile
industry. Turnover declined 25% and profit
61.5% in FY 2013. Exports plunged 53%

to Rs 60 crore and contributed 16% to total


revenue. It is expected to take around two
years to bounce back. Apart from industry
woes, the qualification and product approval
process is lengthy.
Grindwell Norton declared bonus
issues in the ratio of 1:1 in FY 2006 and
FY 1996. Dividend has been in a healthy
range of 65% to 160% in the past decade
ending FY 2013. The balance sheet is
strong, with reserves of Rs 488.5 crore, or
94% of the shareholders fund. The debtto-equity ratio is a mere 0.04 times. The
debt-free company at the net level has a
one-year beta of 0.16.
The countrys leading manufacturer of
abrasives such as bonded, coated, nonwoven, super abrasives and thin wheels and
silicon carbide also makes high-performance
refractories and performance plastics
products. Six manufacturing plants are in
India and one in Bhutan. There are 11 sales
offices across the country. Around 14% of
the revenue comes from exports.
Majority-owned by Saint-Gobain, a
French multinational company into building
and construction material, with turnover of
euro 43 billion in calendar year 2012,
Grindwells project engineering business
derives business from Saint-Gobain
companies based in India and internationally.
The process is on to merge other SaintGobain group companies in India including
listed firm Saint-Gobain Sekurit.
Since 1988, Berger Paints India has
issued bonus shares on four occasions. The
bonus component in the equity capital is
73.4%. Not only this, there is an impressive
record of consistent dividend payment over
the past 24 years. Prior period information
is not available. Turnover has increased 4.7
times, profit 4.9 times, and net worth 5.1
times over the past decade ending FY 2013.
The decorative paints business
contributes over 75% to the total revenue,
while the rest comes from the industrial
segment. There is technical license
agreement with DuPont Performance
Coatings for automotive coatings. The focus
is on expanding geographical coverage
through a large dealer networks.
Capacity is being expanded. The
manufacturing facility at Hindupur, Andhra
Pradesh, started trial production in the
September 2013 quarter. Further, a powder
coating plant is being set up at Jejuri in Pune.
Also, capacity of the resin and water-based
paint is being enhanced.

CoverStory

Stocks

The decorative paints business is


expected to sustain theu robust growth
reported in recent past on account on good
monsoon and strong demand from rural and
semi-urban areas. However, the automotive
segment is likely to remain under pressure
over the medium term.
Small-cap Hercules Hoists has enriched
investors with three bonus issues till date,
with the first being in FY 1997 and the latest
in FY 2012. What is amazing is that 97.6%
of the equity share capital consists of bonus
issues. Moreover, it continues to be a strong
contender for further bonus issues thanks
to the healthy balance sheet with zero debt.
Indeed, this turnaround story has delivered
mouthwatering gains. The stock has
appreciated 37 times over the past 10 years
ending FY 2013.
The Shekhar Bajaj company is a niche
player in material-handling equipment,
manual hoists, electric chain and wire-rope
hoists, traveling trolleys, storage and
retrieval cranes, jib cranes, roll-out racks,

97.6% of Hercules Hoistss capital is bonus shares

ratchet hoists, and light-profile crane


systems. The plant is located at Khopoli in
Maharashtra. Products are sold under the
brand name, Indef, through a network of 44
dealers and agents. Four windmills of 1.25

MW each are in Dhule, Maharashtra. There


is constant exploration of possibilities of tieups with foreign firms to boost exports and
introduce new products and designs.
PI Industries seems to be in a hurry,
issuing bonus shares in FY 2009 and FY
2010. Incorporated in 1947, the agri-input
producer and custom synthesiser operates
three formulation and two manufacturing
facilities as well as five multi-product plants
under its three manufacturing locations
across Jammu and Gujarat.
The flagship business of agri-inputs
includes agro-chemicals, specialty fertilisers,
plant nutrients and seeds. Several global
corporations have given it exclusive rights
for distribution in India. Also, there is
constant evaluation of prospects to expand
the product portfolio. There is an established
distribution network in the country.
Apart from custom synthesis, activities
include contract manufacturing of
chemicals comprising techno commercial
evaluation of chemical processes, scale-up

Past perfect
Profit-making and dividend-paying small- and mid-cap stocks with track record of bonus issues

COMPANY

NO OF
BONUS
ISSUES

CMP
(Rs)

MKT
CAP
(Rs cr)

52-WEEK
HIGH
LOW
(Rs)
(Rs)

Atul Auto

303.7

333.1

Bajaj Electricals

261.4

2608.3

267

149.9

201303

5.03

0.27

Berger Paints

208.2

7214.1

256.3

185.4

201303

25.06

0.56

Elgi Equipments

88

1393.9

95.6

73.6

201303

14.48

0.36

Engineers India

151.1

5091.2

197.4

121.2

201303

30.15

Grindwell Norton

248

1372.9

289.8

217

201303

19.77

0.04

201312

85.9

-16.2

Hercules Hoists

111.4

356.5

134.5

75

201303

19.16

0.02

201312

21.7

-32.5

Hi-Tech Gears

77.9

146.1

89.3

57.1

201303

12.38

0.5

201312

16.1

-27.3

Info Edge (India)

636.1

6944.9

707

285

201303

9.88

201312

101.2

Kansai Nerolac Paints

1043

5621.3

1300

975.3

201303

16.08

0.07

201312

Navneet Education

54.4

1295.8

64.9

50

201303

27.47

0.4

201312

NESCO

794.7

1119.7

861.9

560

201303

22.29

201312

PI Industries

276.1

3757.7

278.7

110.2

201303

22.81

0.54

201312

Poly Medicure

415.8

915.9

459.9

200.1

201303

22.6

0.46

201312

Praj Industries

43.4

769.3

50.7

30

201303

12.19

0.03

Thomas Cook

76

1882.5

92

47.6

201212

12.16

0.5

Unichem Laboratories

217.1

1966.5

225.5

138

201303

16.32

0.05

VST Tillers Tractors

800.2

691.3

859

330

201303

21.68

0.04

Wendt India

1075

215

1350

922

201303

15.87

Zodiac Clothing

198

383.9

227.4

146.7

201303

5.92

0.23

315

139.9

YEAR
ENDED

ROE
(%)

DEBTEQUITY
RATIO

TTM
ENDED

201303

39.76

0.03

201312

TTM CHG IN
RPAT
TTM
(RS CR) RPAT(%)

BV
(Rs)

P/BV

P/E

DY
(%)

67.52

4.5

11.5

1.98

28.9

28.5

201312

-94

72.15

3.62

435.6

0.76

201312

237.9

8.5

27.49

7.57

30.3

0.86

201312

57.3

-6.2

27.37

3.22

24.3

1.2

201312

556.9

-12.7

68.12

2.22

3.97

92.59

2.68

15.1

2.62

49.96

2.23

16.5

1.57

72.51

1.07

9.1

3.21

-25.5

55.73

11.41

100.8

0.16

284.4

39.1

238.81

4.37

28.6

1.05

110.2

8.6

17.58

3.09

13.1

3.31

80.5

0.4

255.22

3.11

13.9

0.44

161.6

70.1

38.94

7.09

39.4

0.36

40.9

105.3

51.05

8.14

38.9

0.48

201312

50.6

-17.7

32.15

1.35

15.2

3.74

201312

62.2

23.4

27.78

2.74

30.3

0.42

201312

177.5

45.7

80.25

2.7

18.8

2.07

201312

73.1

52.5

282.09

2.84

9.5

1.13

201312

12.4

-12.7

432.1

2.49

17.4

1.4

201312

18.8

35.8

124.91

1.59

20.4

1.77

CMP: (current market price) is closing as on 5 March 2014. No of bonus issues: Bonus issued between 1994 and 2014. DY (%): Dividend yield. P/BV: Price to book value. TTM RPAT: Trailing 12 months reported
profit after tax. Change in TTM RPAT is over the corresponding previous period. ROE (%): Return on equity.
Source: Capitaline Databases

10

Mar 17 30, 2014 CAPITAL MARKET

CoverStory
and commercial production. Here, too,
there are exclusive tie-ups with leading
global agro-chemical, pharmaceutical and
fine chemical companies.
Over the past 10 years, turnover
increased 5.1 times and profit 16.2 times.
The good run continues, with turnover
spurting 50% and profit 89% in the nine
months ended 31 December 2013 over a
year ago. Banking on robust cash flows, the
focus is on reducing debt. The aim is to
achieve compounded annual revenue growth
of over 25% for the next three years and an
even higher growth in operating profit.
Unichem Laboratories issued bonus
shares in the ratio of 1:1 in FY 2000 and
FY 2004. Prior to this, bonus shares had
been issued on three occasions between FY
1980 and FY 1994. The range of
pharmaceutical formulations manufactured
and marketed include branded generics as
well as generics in India and several other
overseas markets.
A little over one-third of the revenue
comes from the overseas market. Around
90% of the revenue comes from
formulations and remaining 10% from active
of one of pharmaceutical ingredients (APIs).
Leading brands of one of the main players
in the therapy areas of cardiology, neurology,
orthopedics and anti-infectives in the
domestic market include Losar in the antihypertensive segment and Ampoxin, Telsar,
Unienzyme, Trika, Olsar, Serta, Metride,
Zyncet, and Lezyncet.
With negligible debt on the balance
sheet, the debt-to-equity ratio is 0.05. In a
windfall, in October 2013, the new
formulations manufacturing unit located in
the Indore special economic zone in Madhya
Pradesh was sold on a slump-sale basis to
Mylan Laboratories for Rs 160.5 crore. The
proceeds will be deployed to fund expansion
of the Goa facility. Opportunities are also
being explored to acquire API facilities.
Elgi Equipments issued bonus shares in
the ratio of 1:1 in FY 2000 and FY 2010. The
leading air compressor manufacturer offers a
range of compressed air solutions from oillubricated and oil-free rotary screw
compressors, oil-lubricated and oil-free
reciprocating compressors, and centrifugal
compressors to dryers, filters and downstream
accessories. The portfolio of over 400 products
have applications across several industries.
The compressor business contributed 83% to
sales while the automotive equipment
accounted for 13% in FY 2013.
Mar 17 30, 2014 CAPITAL MARKET

Stocks
least-leveraged balance sheet in the sector.
Capital expenditure of around Rs 12 crore
was incurred in FY 2013 as against Rs 18.5
crore in the previous year.

Zodiacs debt-free equity ratio is 0.23

In FY 2013, 100% equity stake was


acquired in Rotair SPA, Italy, and Pattons
Inc, USA. These acquisitions have opened
access to new technologies, product lines
and distribution and service systems. Till
recently debt-free, debt to was taken to fund
expansion and acquisition. The debt-toequity ratio is 0.36 times.
A marginal growth in turnover is
expected in FY 2014 backed by the
international businesses, while the domestic
market is expected to remain sluggish. Over
the last two-and-a-half years, there has been
a marked increase in mutual fund holding
to 10.34% from 4.19%.
Since its public issue in 1994, Zodiac
Clothing Company has issued bonus shares
in FY 2005, FY 2010 and FY 2011.
Dividend is being paid on a consistent basis
since FY 1995. Established six decades
ago, one of the largest shirt companies in
the world designs, manufactures and
markets mens shirts and clothing
accessories to the best brands and stores
across the globe. With 3,500 people
employed in 16 offices and seven plants
located across India, the UAE, Germany, the
USA and the UK, the overall manufacturing
capacity is 60 lakh units per annum.
There is presence in the fine-tailoring
segment of suits and trousers, too. The
portfolio includes a club wear brand,
Zod!, and a brand in the relaxed luxury
segment, z3. Overseas design offices in
London and New York complement over
105 company-owned and operated stores
across India.
With debt-to-equity ratio of mere 0.23
times, the organised retail player has the

Conclusion
Bonus is an often-repeated demand of minority shareholders at annual general meetings even if the company has a good record
of profit, dividend and bonus issue. Some
companies have declared bonus issues within
a short span of time, while many have not
done so for a very long period. The next bonus announcement from those which have issued bonus shares recently could take sometime. It is impossible to predict when a company will announce a bonus issue.
Bonus shares issued in the past may not
have a bearing on future. Many companies
issuing bonus shares in the past have
reported disappointing numbers in recent
times. Economic slowdown is one of the
major reasons. Of the 20 shortlisted
companies, nine have reported decline in
profit in the trailing 12 months ended 31
December 2013. Bajaj Electricals, Hercules
Hoists, Hi-Tech Gears, and Info Edge
(India) have reported fall in profit in excess
of 25%. This also means these companies
could take time to bounce back and deliver.
As these companies have issued bonus
shares on two or more occasions in two
decades, they have a philosophy of creating
shareholder wealth. Further, these are profitmaking and dividend-paying companies.
Most have debt-to-equity ratio below 0.60
times and, indeed, half of them have
insignificant or even zero debt on their
balance sheets.
Investors should focus on the ability of
companies to keep dividend payouts at a
healthy level on expanded capital post
bonus issues. Reduction in dividends after
bonus is not good news for long-term
investors. The overriding factor is to focus
on a companys financial performance,
corporate governance, size of opportunities
and outlook for the industry before taking
the plunge.
These stocks are certainly not for shortterm trading. Investment in these companies
can be contemplated with medium- to longterm horizon. Only surplus funds not needed
over the next few years can be invested in
these stocks. Nonetheless, these companies
hold promise and can be monitored at
regular intervals.
S Khedekar

11

InFocus
InFocus

Restructuring

Losing weight
Many firms are undertaking cost-cutting or de-leveraging their
balance sheets to better prepare for economic reality
The Indian economy continues to struggle.
It reported a growth of 4.7% in the third
quarter ended 31 December 2013. This is
the seventh straight quarter when the
economy recorded sub-5% economic expansion. It is expected to clock a growth of
4.9% in the current fiscal ending 31 March
2014 (FY 2014).
Now even the estimate of 4.9% released
by the Central Statistics Office (CSO) a few
weeks ago for the current fiscal looks optimistic. The Indian economy expanded a mere
4.5% in FY 2013 a decade-low growth
rate. This is really a sorry state of affairs for
a country dreaming about double-digit
growth not too long ago.
There are several companies that have
been caught offguard by the economic slowdown, with no sign of revival. Indeed, the
economic situation is so grim that a few
companies are struggling to survive the
present crisis.
No wonder, many firms are in a restructuring mode. This exercise could be tagged
as consolidation or integration of businesses,
organisational revamp and so on. But, in
essence, the idea is to restructure the group
to better prepare for economic reality.
Cost-cutting is one of the focus areas
for companies to improve profitability.
Several companies are de-leveraging their
12

balance sheets. Many had accumulated


huge debt in the hey-days of 2006 to 2008
and are trimming it down. The present
high interest-rate regime is making matters worse. One of the key initiatives undertaken by these companies is to offload
non-core businesses and loss-making ventures. The intention is to shed debt, raise
cash and cut losses.
Tata Communicationss wholly
owned subsidiary VSNL SNOSPV Pte Ltd
in the quarter ended 30 September 2013

On the way out


Sintex has decided to sell its long-term
equity investment of Rs 111 crore in
wholly owned subsidiary Zep Industries.
It has advanced Rs 67.8 crore to Zep
Relative performance of
Sintex Industries v BSE Sensex

Base=100 as on 11 March 2013


Face value: Re 1.

entered into exclusive discussions with the


Vodacom Group to sell its entire equity
holding in Neotel Pty Ltd. Neotel is a
stepdown subsidiary of the company in
South Africa, which is still in the gestation
period. It made provision of Rs 134.8 crore
in standalone accounts towards diminution
in the carrying amount of investments and
advances in Neotel in the nine months ended
31 December 2013.
In 2008, Tata Communications entered
the South African market as a strategic partner to Neotel. The company increased its
effective holding in Neotel to 64.10% by
March 2012 and 67.32% by December 2012.
As per the companys annual report, the
consolidated net loss includes Rs 246.9 crore
(US$ 45.29 million) from its holding in
Neotel, South Africa. As a high-potential new
business, Neotel needs investments to establish its capabilities. The company turned
profitable at the operating level in FY 2013.
However, Neotel will need additional funding to turn profitable.
Tata Communications is struggling, with
massive debt of Rs 12362.4 crore and debtto-equity ratio of 6.29 end of FY 2013.
The proposed move is an attempt to reduce debt. The companys consolidated
turnover rose 12.7% in the nine months
ended 31 December 2013. It reported profit
of Rs 211.4 crore as against loss of Rs 618.1
crore a year ago.
Sintex Industries is eagar to press the
exit button on its telecommunications infrastructure business. It has decided to sell
its long-term investment in wholly owned
subsidiary Zep Industries. The move is considering the prevailing challenging situation
Mar 17 - 30, 2014 CAPITAL MARKET

InFocus
in the telecommunications infrastructure industry. Sintex has an equity investment of
Rs 111 crore in and outstanding advance of
Rs 67.8 crore to Zep. The company has
already received a few offers and negotiations are on. Sintex does not envisage any
loss at this stage. The leading manufacturer
of plastic water tank will be making any
adjustment that may be necessary to the
carrying value of investment upon
finalisation of the terms.
Alstom India is another case. The board
of directors in January 2014 approved the
sale and transfer of its transportation system undertaking to group company Alstom
Transport India as a going concern on a
slump-sale basis. The sale will fetch a total
consideration not less than Rs 176.9 crore
in cash as enterprise value. This transfer is
subject to adjustment for change in the net
asset value excluding cash and debt and other
terms and conditions.
The transport segment was considered
as discontinuing operations by Alstom India in the quarter ended 31 December 2013.
The division reported revenue of Rs 209.3
crore and profit before tax of Rs 14.7 crore
in the nine months ended 31 December 2013.
In November 2013, Mahindra Holidays
& Resorts India divested its entire
shareholding in subsidiaries BAH
Hotelanlagen AG, Austria, and MHR Hotel
Management GmbH, Austria. Thus, these
two firms have ceased to be subsidiaries of
Mahindra Holidays. Further, Mahindra Holidays is in the process of amalgamating wholly
owned subsidiary Bell Towers Resorts Pvt
Ltd with itself. The board of directors approved the amalgamation in September 2013
and the company is in the process of obtaining other necessary approvals.
Delhi-based HT Media, the publisher
of Hindustan Times, is focusing on improving profitability and reshaping the balance
sheet. HT Digital Media Holdings (HT Digital) in the December 2013 quarter filed a
petition with the High Court (HC) of Delhi
under Section 100 to 105 of the Companies
Act, 1956, for reduction in its equity capital
by Rs 159.4 crore. HT Digital is a subsidiary of HT Media. After the HCs nod, the
equity share capital of HT Digital will be
reduced from Rs 176.6 crore to Rs 17.2 crore.
Accordingly, parent company HT Media
will pave its equity investment in HT Digital by writing off the investment by Rs 159.4
crore. The company has already recorded
diminution in the value of investment in FY
Mar 17 - 30, 2014 CAPITAL MARKET

Mahindra Holidays has pulled out from Austrian subsidiaries

2013. HT Digital reported loss of Rs 159.5


crore in FY 2013.
Earlier, HT Media completed the re-jig
of its job portal business. Firefly e-Ventures
(FEVL), a stepdown subsidiary, and subsidiary of HT Digital, demerged its job portal business under the banner Shine.com and
transferred it to HT Media. The restructuring was approved by the HC in April 2013.
The de-merger and integration with the company came into effect in the quarter and year
ended 31 March 2013. According to the company, the restructuring was undertaken to
consolidate its business. FEVL reported loss
of Rs 58.4 crore in FY 2013.
Additionally, FEVL in the quarter ended
31 December 2013 transferred its movie review and rating business under the banner,
Desimartini, as a going concern on a slumpsale basis to Topmovies for an aggregate
consideration of Rs 95 lakh. Desimartini has

Turning lighter
DLF bought down consolidated debt of
Rs 24801 crore on 31 March 2013 to Rs
23502 crore on 31 December 2013. Net debt
stood at Rs 17400 crore mid February 2014
Relative performance of
DLF v BSE Sensex

Base=100 as on 11 March 2013


Face value: Rs 2.

seven million page views a month.


HT Medias consolidated turnover increased 7% to Rs 1656.8 crore and profit
after tax 40.8% in the nine months ended
31 December 2013. In February 2014,
Rakesh Jhunjhunwala bought 15 lakh equity shares of HT Media for about Rs 10.7
crore through the open-market route at an
average price of Rs 71.3.
Countrys leading real estate company
DLF is all out to reduce debt. It had consolidated debt of Rs 24801 crore on 31
March 2013 and managed to bring it down
to Rs 23502 crore on 31 December 2013.
Till mid February 2014, net debt stood at
Rs 17400 crore. This is in line with the
guidance provided by the company to bring
down net debt to Rs 17500 core to 18000
crore in FY 2014.
In January 2014, DLF sold 100%
shareholding in Silverlink to Aman Resorts
Group (ARGL), a joint venture between
Peak Hotels & Resorts Group and Adrian
Zecha, the founder of Amanresorts, for an
enterprise value of around US$ 358 million.
DLF will be accounting this transaction in
the quarter and year ended 31 March 2014.
However, it has reversed provision of Rs 65
crore made in FY 2013 to take care of impairment of goodwill.
In July 2013, DLF entered into definitive agreement with Goyal MG Gases Pvt
Ltd (GMGPL) to transfer 11.2-MW capacity wind turbines situated in Karnataka. This
agreement was terminated and a new definitive agreement was executed in September
2013 with Rugby Renergy Pvt Ltd (RRPL),
a subsidiary of GMGPL, for transferring
the undertaking by way of slump-sale for
Rs 29.2 crore. The deal is subject to certain
terms and conditions. RRPL will take over

13

InFocus
the assets and liabilities along with relevant
long-term loans.
In October 2013, DLFs subsidiary
DLF Home Developers transferred DLF
Homes business comprising 33-MW capacity wind turbines situated in Rajasthan
to Violet Green Power Pvt Ltd by way of
slump-sale for Rs 67.4 crore.
In 2014, DLF entered into a final settlement with the Delhi Development Authority
(DDA) for the Dwarka Convention Centre
project. As per the settlement agreement, the
company received a refund of Rs 675.8 crore
from the DDA as full and final settlement after
forfeiture of 25% of the earnest money. The
company returned a 35-acre plot of land it
acquired in Dwarka in 2007 to build a convention centre. It recorded foreseeable loss of Rs
411.4 crore in the December 2013 quarter.
In October 2013, DLFs two subsidiaries, DLF Home Developers along with DLF
Projects, offloaded their entire 60%
shareholding in subsidiary DLF Star Alubuild
Pvt Ltd at an enterprise value of Rs 79.8
crore. Also, DLF sold its entire 74% equity
stake in its life insurance joint venture, DLF
Pramerica Life Insurance Company, to
Dewan Housing Finance Corporation.
Another company for whom trimming
high debt is the among the top priorities is
Larsen & Toubro (L&T). Debt stood at
Rs 65947.7 crore end FY 2013, with the
debt-to-equity ratio of 1.74. It has transferred its hydrocarbon business along with
assets and liabilities to wholly owned subsidiary L&T Hydrocarbon Engineering
(LTHE). After necessary formalities like approvals of shareholders and creditors, the
Mumbai HC okayed the transfer in December 2013. The certified copy of the HC order was filed with the Registrar of Companies in January 2014. The effect to the
scheme was given from 1 April 2013. L&T
seems to have larger plan for LTHE. Once
this business scales up, the company could
go ahead and list LTHE.
Further, L&T transferred at book value
to its wholly owned subsidiaries the business of manufacturing and marketing of industrial valves from 1 July 2013 and cutting
tools business from 15 July 2013. These
two businesses were as part of the machinery and industrial products segment
In December 2012, Ranbaxy Laboratories approved the proposal to integrate
the business operations and management of
subsidiary Ranbaxy Unichem Co (Unichem)
with Daiichi Sankyo (Thailand), a subsid-

14

L&T has tranferred the hydrocarbon business to subsidiary

iary of Daiichi Sankyo Company, Japan.


Daiichi Sankyo, Japan, is the ultimate parent company of Ranbaxy. This integration
was completed from 1 October 2013. On
completion of this exercise, Unichem became
an associate of Ranbaxy. The gain of Rs 9.6
crore on this restructuring was included in
Other income in the quarter ended 31 December 2013.
Capital First in November 2013 decided
to discontinue its broking business. This business was carried through subsidiary Capital
First Securities (CFSL) and stepdown subsidiary Capital First Commodities (CFCL).
Capital First took additional diminution in
the value of investment in subsidiaries of Rs
1.97 crore in the December 2013 quarter. Earlier, the company provided Rs 31.5 crore in
the quarter ended 30 September 2013. With
discontinuation of the wealth management
business and revision in the staff benefit esti-

Turning red
TVS Electronics incurred loss of Rs 23
lakh in the quarter ended 31 December
2013 arising out of restructuring of two
manufacturing plants into one
Relative performance of
TVS Electronics v BSE Sensex

Base=100 as on 11 March 2013


Face value: Rs 10.

mates, the employee benefits expenses were


lower in the quarter and nine months ended
31 December 2013. The consolidated employee benefits expenses declined marginally
by 5% to Rs 100.4 crore in the nine months
ended 31 December 2013.
TVS Electronics incurred loss of Rs
23 lakh in the quarter ended 31 December
2013 arising out of restructuring of two
manufacturing plants into one. This loss
has been presented as Exceptional item in
the financial statement. The company provides information technology-related products and services.
Mudra Lifestyle is contemplating
transfer of the D-1 unit of its fabric business located at Tarapur, near Mumbai, to ELand Fashion India Pvt Ltd, a 100% subsidiary of the holding company, E-Land Asia
Holding Pte. Ltd, by way of slump-sale and
sell some of its other specified assets to prospective buyer. This transaction is subject
to approval of the shareholders apart from
other requisite permissions. Further, if the
transaction materializes, it is not going to
have any impact on the going-concern status of the company.
The board of directors of New Delhi
Television (NDTV) in principle approved
the merger of NDTV Labs with NDTV Convergence. Both are step-down subsidiaries
of NDTV. Himadri Chemicals & Industries sold equity shares of a wholly owned
subsidiary to another wholly owned subsidiary. The firm earned profit of Rs 7 crore
on this transaction, treated as Exceptional
item, in the nine months ended 31 December 2013. Himadri Chemicals makes carbon
materials and chemicals.
The board of directors of Tata
Chemicals approved the scheme of amalMar 17 - 30, 2014 CAPITAL MARKET

InFocus
gamation of Homefield International Pvt
Ltd with itself. Homefield is a wholly
owned subsidiary of Tata Chemicals, with
registered office in Mauritius. No equity
shares were issued in this transaction and,
thus, no rights of the existing shareholders diluted. The appointment date of the
scheme was 1 April 2013. The manufacturer of inorganic chemicals and fertilisers
has filed a petition under Sections 391 to
394 of the Companies Act, 1956 with the
HC of Mumbai.
Shriram EPC obtained the shareholders approval through postal ballot in August 2008 for transfer of the 250-MW
wind-turbine business to its erstwhile joint
venture, Leitwind Shriram Manufacturing,
from 1 April 2008. The transfer is in process as Leitwind is still to obtain the necessary statutory approvals. Consequently,
the company has not recognized the gain
or loss on this particular transaction in the
books of accounts.
The board of directors DB Realty in
February 2014 approved the scheme of arrangement for amalgamation of subsidiary
Gokuldham Real Estate Development Company Pvt Ltd from 1 April 2013 and subsidiary Real Gem Buildtech Pvt Ltd from 1
April 2014. These amalgamations are subject to necessary approvals. DB Realty is a
Mumbai-based real estate developer.
Lumax Auto Technologies received
two approvals from the HC of Delhi in January 2014 for scheme of arrangements. First,
the court approved the scheme of arrangement of Lumax DK Auto Industries, a wholly
owned subsidiary, to de-merge its gear shifter
division including the research and development facilities to Lumax Mannoh Allied Technologies Pvt Ltd. Lumax Mannoh Allied is
also a subsidiary of the company. The demerger is effective from the appointed date
of 1 October 2013.
Second, the HC sanctioned the merger
of Lumax DK Electric Engineering India Pvt
Ltd with its holding company, Lumax DK
Auto Industries, a wholly owned subsidiary of Lumax. This merger is effective from
the appointed date of 1 April 2013. Lumax
makes automobile components like frame
assemblies, gear shifters, parking brakes, and
petrol tanks.
NCCs wholly owned subsidiary NCC
Infrastructure Holdings and Gayatri Energy
Ventures Pvt Ltd jointly own NCC Power
Projects (NCC Power), which is implementing a 1,320-MW thermal power project near
Mar 17 - 30, 2014 CAPITAL MARKET

Gateway Distriparks has merged subsidiary

Krishnapatnam, Nellore, in Andhra Pradesh.


The promoters of NCC Power entered into
definitive agreements with Sembcrop Utilities Pte Ltd for sale of 45% equity stake
held in NCC Power. The transaction is subject to compliance of the conditions. NCC
is into construction and infrastructure.
Gateway Distriparks approved the
amalgamation of wholly owned subsidiary
Gateway Distriparks (South) Pvt Ltd with
itself in February 2013, with the appointed
date as 1 April 2013. The board of directors
amended the scheme at their meeting held in
January 2014 and changed the appointed
date to 1 April 2014. The company is into
three business segments of container freight
station, rail logistics, and coal chain and related logistics.
The scheme of amalgamation of SaintGobain Sekurit India, SEPR Refractories
India and Saint-Gobain Crystals & Detectors India with Grindwell Norton was ap-

Reorganising
The functional solutions segment of
BASF India is now functional material
and solutions and includes parts of
engineering plastics and polyurethanes
Relative performance of
BASF v BSE Sensex

Base=100 as on 11 March 2013


Face value: Rs 10.

proved by the shareholders in a court-convened meeting held in November 2013, as


per Sections 391 to 394 of the Companies
Act, 1956. However, the scheme did not get
approval from the requisite majority of public shareholders in terms of a circular issued
in February 2013 and May 2013 by the Securities Exchange Board of India.
IDFCs wholly owned subsidiary IDFC
Securities has filed a scheme of arrangement
with the Mumbai HC seeking approval for
the merger of wholly owned subsidiaries
IDFC Capital, IDFC Distribution Company
and IDFC Pension Fund Management Company with itself. This will be from 1 November 2013. HCs nod is awaited.
BASF India reorganised its segment
structure from 1 April 2013 to better align
to market needs. Accordingly, the plastic
segment has ceased to exist. The functional
solutions segment has now been renamed as
functional material and solutions. This segment includes part of engineering plastics
and part of polyurethanes, which were in
the plastic segment. The remaining part of
the plastic segment is now included in the
chemicals segment.
Countrys leading newspaper group DB
Corp approved the merger of the Internet
and mobile interactive service business of I
Media Corp (IMCL), a wholly owned subsidiary, with itself. This business will be
demerged from IMCL and subsequently
merged with DB Corp from the appointed
date of 1 April 2013. The company is in the
process of obtaining necessary approvals.
Conclusion
Ups and downs are inherent in any business. The question is whether a company
has the ability to emerge from the shambles.
A glance at several companies reveals that
fact restructuring could be a lengthy and
painful process. Exiting a business could be
as time-consuming as amalgamating companies within the group.
Invariably, this means investors need
to wait patiently to reap the benefits of
restructuring. Whether a company will able
to reorganise its business or streamline the
balance sheet successfully is something difficult to guess. Investors should take a call
based on the merits of each case. Of course,
they should also consider their risk-profile
before exploring such companies. Anyway,
the ultimate fact is the economy should witness a revival for Indian Inc to bounce back.
S Khedekar
15

InFocus

Auto Ancillaries

Cash crunch
May companies have used short-term funds for long-term
purposes and not provided for decline in the value of investment
The domestic automobile industry is facing
headwinds. So do their suppliers: the auto
component manufacturers. Sales of passenger vehicles declined 5.7% and commercial
vehicles 18.4% between April and December 2013 over a year ago.
Several auto component manufacturers, particularly small caps, are available
at substantial discount to their book values (BVs). The difficult time faced by the
auto industry islso evident from the statutory auditors reports of many companies
for the latest financial year ending March
2013 (FY 2013).
One of the key challenges that emerge
from the auditors report is the cash crunch
faced by the auto industry, particularly the
mid- and small-sized companies by turnover. Several firms have lagged in depositing
statutory dues like provident fund, income
tax, and sales tax. This slight delay is something that could be unusual and may need
close scrutiny. Further, companies can be
seen utilising funds raised on short-term basis
for long-term purposes such as investment
in fixed assets.
In a few cases, companies have declined
to acknowledge the decline in the carrying
value of investment. Out here, the balance
sheet remains inflated. Also, a few instances
16

of frauds were noticed by the auditors.


The auditors of Sundaram Clayton
have pointed to a few delays in depositing
undisputed statutory dues such as valueadded tax, customs duty, and income tax
deducted at source. Further, the company
came across a fraud perpetrated by one of
its employees, causing a loss of Rs 51 lakh.
However, it recovered the entire amount
from the employee in FY 2013 itself. Minda
Industries reported a slight delay in payment of undisputed statutory dues such as
Vat, withholding taxes, provident fund and
employee state insurance fund in a few cases.
Similarly, the auditors of Jamna Auto
Industries observed slight delay in depositing undisputed statutory dues in a few
cases in FY 2013. The auditors noticed certain statutory dues like income tax, sales tax
and excise duty were in arrears on 31 March
2013 for more than six months from the date
they became payable.
Funds amounting to Rs 39.3 crore raised
on short-term basis were used by Jamna for
long-term investments in FY 2013. The company has defaulted in repayment of dues
aggregating to Rs 91.8 crore to banks and a
financial institution. The delays were up to
35 days. However, there were no overdue
amounts outstanding end FY 2013.

Jamna noticed an instance of an attempted fraud by a job worker. This involved


inventories and a business advance provided
in earlier years. It has taken all necessary
steps including criminal action against the
job worker. The amount involved is not significant and the company has made a full
provision for it.
Other companies to have reported slight
delay in depositing undisputed statutory
dues in FY 2013 include Munjal Showa,
Fiem Industries and Lumax Industries.
The auditors of Phoenix Lamps (earlier known as Halonix) have drawn attention to the fact that managerial remuneration of Rs 2 crore paid and or provided to
directors and erstwhile managing directors
in FY 2013 and earlier years exceeded the
limits prescribed under the Companies Act,
1956, and approval earlier obtained from the
Central government. The company is in the
process of seeking necessary clearances. In
the meantime, no adjustment has been made
in the books of accounts.
Additionally, certain discrepancies have
been identified and are being reconciled in
fixed assets. Phoenix Lamps believes that
the reconciliation will not have a material
financial impact. The reconciling differences, if any, will be accounted post
completion of reconciliation, which will be
carried over three years in a phased manner. Last, the auditors have observed slight
delays in depositing undisputed statutory
dues in a few cases.
Setco Automotive has used short-term
funds amounting to Rs 8.44 crore for longterm investment in non-current assets. FurMar 17 30, 2014 CAPITAL MARKET

InFocus
ther, trade payables are under reconciliation
process. Necessary adjustments, if needed,
will be accounted when the reconciliation is
complete. For trade receivables and other
debt and credit balances, balance confirmations have not been obtained and, thus, subject to reconciliation.
Rico Auto Industries reported delay
in repayment of an installment of Rs 92
lakh to a financial institution for 37 days
by 31 March 2013. This installment was
paid on 12 April 2013. Also, there was
slight delay in depositing undisputed statutory dues in FY 2013.
As per the auditors, Rico Auto has used
funds raised on short-term basis for longterm investment. It had raised funds amounting to Rs 33.2 crore from short-term borrowings in FY 2013. These would fall due
for repayment within one year from the date
of their receipt. These funds have been invested for acquiring long-term investments
and fixed assets.
The auditors of Autoline Industries
have drawn attention to non-provision
for diminishing in the value of investment in wholly owned subsidiary Koderat
Investments (Cyprus). In turn, Koderat
utilised the funds for investment in SZ
Design SRL and Zagato SRL Milan Italy.
Koderat reported losses in the last two
financial years.
Autoline has deposited Maharashtra Vat
of Rs 78.8 lakh and Central sales tax of Rs
55877 with a delay of more than six months.
Further, the funds raised on short-term basis were used for long-term purposes.
The auditors have not audited the financial statements of three subsidiaries of
Autoline. The financials statements have
been provided by the company. These subsidiaries include Autoline Industries USA
(total assets Rs 61.8 crore), Koderat Investments (total assets Rs 33.8 crore), and
Autoline Stampings, South Korea (total assets Rs 11.4 crore).
The auditors of Alicon Castalloy had
put two issues as emphasis of matter without qualifying the books of accounts. First,
it has no dues payable to suppliers covered
under the Micro, Small and Medium Enterprises Development Act, 2006. The auditors have relied on management confirmations. Second, the company maintained that
all trade receivables were good and realisable
in the ordinary course of business and, thus,
no provision was called for doubtful debts.
In the absence customer confirmations at
Mar 17 30, 2014 CAPITAL MARKET

Black hole
Financial statements of certain subsidiaries of Ucal Fuel Systems have not been
audited and the books of accounts were considered on the management's certification

Debt blow
Ucal is a profit-making and dividendpaying company for the last three years
but is reeling under high debt with debtto-equity ratio over six
Relative performance of Ucal Fuel Systems
v BSE Sensex

Base=100 as on 07 March 2013


FV of Ucal Fuel Systems Rs 10.

* 07 March 2014

Ucal Fuel Systems has equity investment aggregating to Rs 154.9 crore in


Amtec Precision Products Inc, USA, a
wholly owned subsidiary. It has
extended interest-free advance of Rs
116.4 crore in the fiscal ended March
2013 (FY 2013) (Rs 101.9 crore in FY
2012). Also, the company has given
guarantees aggregating to Rs 94.4 crore
(Rs 103.3 crore in FY 2012) to banks on
its behalf. The net worth of Amtec
Precision has been fully eroded. Amtec
Precision reported higher loss of Rs 5.8
crore in FY 2013 compared with loss of
Rs 23 lakh in FY 2012.
According to Ucal, the operations of
Amtec Precision have shown a marked
improvement compared with the
previous years and, thus, no provision
was considered necessary for investments and financial exposure. The books
of accounts have not been qualified on
this point by the auditors.
According to additional information
available in the notes of accounts for
FY 2013, Ucal's debtors include Rs
20.5 crore (Rs 21.6 crore in FY 2012)
due from Amtec Precision. Ucal has
worked out a deferred payment plan.
Now, these amounts are expected to be
realised over a period of time. Thus,
these have been classified as outstanding for less than six months.

Managerial remuneration of Rs 2.6


crore paid in FY 2013 is in excess by Rs
51.7 lakh of the limits specified under
Section 198 read with Section 309 of the
Companies Act, 1956. This was on
account of inadequacy of profit. Its
shareholders in the annual general
meeting held in September 2011 have
approved the continuation of payment
of remuneration in case of inadequacy of
profit. Ucal has sought he nod of the
Central government.
As per the auditors report on
consolidated accounts, financial
statements of certain subsidiaries have
not been audited by it. But the books of
accounts were considered for consolidation based on the management's
certification. These include Amtec
Precision and UPIL, USA, a stepdown
subsidiary.
Ucal is profit-making and dividendpaying company for the last three years.
It is of reasonable size, with turnover of
Rs 653.5 crore in FY 2013. But, on the
flip side, it is reeling under high debt
with debt-to-equity ratio over six.
Besides significant quantum of money is
stuck in Amtec Precision. Ucal's
financial exposure including equity and
advances to Amtec Precision is around
2.9 times Ucal's current market value of
Rs 94 crore.

17

InFocus
large, the auditors have relied on
managements confirmation.
The auditors of JBM Auto have noticed
several delays in repayment of term-loan
installment and interest to bank in FY 2013.
Delay of 91 days in the payment of second
installment and 20 days in the payment of
third quarterly installment of Rs 1.05 crore
each was noticed. Further, delay of interest
payment on term-loans ranged from 20 days
to 91 days, with the amount involved ranging from Rs 10 lakh to Rs 21.6 lakh. These
were duly paid in FY 2013.
Funds of Rs 6 crore raised on shortterm basis by JBM were temporarily employed for a project. There was replenished in FY 2013. In their report for consolidated financial statements, the auditors have drawn attention to the fact that
the accounting policies followed by the
subsidiaries and joint ventures were different from the accounting policies of JBM
on inventory accounting.
Further, the audit report on consolidated
accounts mentioned that the financial statements of two joint ventrues JBM MA
Automotive Pvt Ltd and Indo Toolings Pvt
Ltd were unaudited. The total assets of
these two subsidiaries were Rs 301.4 crore
and total revenue Rs 328.2 crore in FY 2013.
The auditors Harita Seating Systems
reported defalcation of Rs 6 lakh by alter-

Clutch Auto provided depreciation of Rs 5.9 crore instead of Rs 17.99 crore in FY 2013

ation of vouchers. The amount was written off as recovery was not possible. The
company has since then taken adequate
measures to prevent recurrence of such instances in future. Further, there have been
marginal delays in depositing service tax.
Automotive Stampings & Assemblies
used funds raised on short-term basis for longterm investment. It obtained short-term borrowings and trade payables of Rs 35.5 crore
on a short-term basis. These funds have been
used for fixed assets and other long-term assets. There was a slight delay in a few cases
in payment of statutory dues in FY 2013.

Further, the auditors of Automotive


Stampings reported an incidence of theft
of certain repair parts and material received from a customer for use in assembly to be despatched to the customer. A
contract employee along with two security agency employees were detected at
its Bhosari plant, Pune, for the theft. An
FIR was filed. The total value of the parts
stolen was Rs 58.5 lakh. The amount was
charged to revenue. The company has
taken steps to strengthen the internal
control procedures to prevent such instances in future. Also, it has filed a sum-

Challenging times
Several auto component stocks, particularly small caps, are available at substantial discount to their book values

Alicon Castalloy
Autoline Industries
Autolite (India)
Automotive Stampings
Bharat Gears
Clutch Auto
Harita Seating Systems
Hella India Lighting
Jamna Auto Industries
Jay Ushin
JBM Auto
Phoenix Lamps
Rico Auto Industries
Setco Automotive
Ucal Fuel Systems

CMP

MKT CAP

52-WEEK

(Rs )

(Rs cr)

HIGH
(Rs)

76.3
64.6
17.4
28.8
42.5
13.0
76.9
120.5
52.6
66.1
72.1
109.8
10.5
70.5
42.5

83.9
79.4
16.4
45.6
33.2
24.3
59.7
38.2
207.9
25.5
73.5
307.7
142.2
188.1
94.0

85.0
133.7
22.0
42.8
53.9
24.0
98.0
152.6
89.8
86.9
72.1
134.0
14.1
120.0
64.0

YEAR

TOTAL

DEBT-

BOOK

P/E

DIVIDEND

P/BV

LOW
(Rs)

Ended

DEBT
(Rs cr)

RATIO
(Rs cr)

VALUE
Rs)

RATIO

YIELD
(%)

PAT
(Rs cr)

42.0
46.1
10.1
22.5
23.3
12.1
62.6
104.0
50.1
48.6
39.0
26.9
4.2
62.0
34.3

201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303

105.14
246.09
14.77
52.80
72.95
226.27
53.88
0.00
166.19
81.89
374.71
165.51
499.09
180.83
378.16

1.29
0.85
0.42
0.55
0.96
1.59
0.64
0.00
1.06
2.46
2.02
1.35
1.43
1.20
6.22

83.2
226.0
33.6
46.7
91.7
65.3
85.8
44.5
43.3
95.8
165.4
33.3
25.4
56.9
26.7

5.0
0.0
32.7
0.0
10.3
0.0
5.3
0.0
78.2
2.6
1.9
0.0
13.8
7.6
17.2

2.62
1.54
0.00
0.00
4.25
0.00
3.25
0.00
3.81
3.03
4.54
0.00
1.43
3.80
2.35

0.92
0.29
0.52
0.62
0.46
0.20
0.90
2.71
1.22
0.69
0.44
3.29
0.41
1.24
1.59

CMP (current market price) is closing as on 19 February 2014. Select stocks discussed in the article are given in this table.
Source: Capitaline Databases

18

Mar 17 30, 2014 CAPITAL MARKET

InFocus
mary suit against the agencies for indemnification of the loss caused.
In FY 2013, Hella India Lighting
implemented a new integrated system. During data migration, the company observed
discrepancies in inventory records uploaded in the new system and conducted
complete physical verification at all its units
except for stock lying with third parties.
Based on the physical verification, the closing inventory was updated in the books. It
has not performed reconciliation between
inventory initially uploaded in the new
system and inventory considered as per
physical verification.
Further, Hella noticed discrepancies in
the valuation of the inventory of finished
goods and work in process. It is in the process of reconciling these differences. The
auditors were unable to comment on the
financial impact on finished goods and
work in process on 31 March 2013. The
auditors have expressed qualified opinion
on this matter.
The auditors of Hella noticed multiple
significant delays in depositing provident
funds, employees state insurance and sales
tax. The company incurred cash losses in
FY 2013 and FY 2012.
In FY 2013, Rs 22.8 crore of the funds
raised by Bharat Seats on short-term basis
were used for long-term investment. Similarly, Triton Valves used Rs 77.4 lakh raised
on short-term basis for long-term investment
including acquisition of fixed assets and repayment of long-term loan.
The remuneration paid by Bharat
Gears to the joint managing director for FY
2013 included provision of Rs 50.8 lakh
made on the basis of shareholders' approval
in excess of the limit specified under Section
198 read with Section 309, and Schedule XIII
to the Companies Act, 1956. The excess remuneration is subject to the approval of the
Central government. The company is in the
process of seeking it.
Clutch Auto provided depreciation of
Rs 5.9 crore instead of Rs 17.99 crore, as
calculated according to the Schedule XIV of
the Companies Act, 1956. Had the company
provided depreciation of Rs 17.99 crore, the
loss would have increased to Rs 46.3 crore
instead of Rs 34.2 crore reported in FY 2013.
The auditors of Clutch were appointed
for FY 2013 after conclusion of the 41th
annual general meeting in FY 2012. Due to
labour problem and other shifting-related
issues, the auditors have not been able to
Mar 17 30, 2014 CAPITAL MARKET

The auditors of Autolite (India) have expressed qualified opinion on multiple counts

verify personally fixed assets, inventory and


other statutory registers at the company's
Faridabad plant in Haryana, which also
houses its administrative office. The auditors have relied on the accounting books
maintained in electronic form and some other
physical records apart from reports of previous auditors and information given by the
management. Quantitative details applicable
to fixed assets such as tools and implements
have not been maintained by Clutch Auto.
In case of IP Rings, short-term funds of
Rs 9.7 crore were used for long-term investments in FY 2013. Jay Ushin used funds of
Rs 52 crore raised on short-term basis for
long-term investment. The company is
strengthening the procedures for physical
verification of fixed assets and inventories.
It is strengthening the internal control for
inventories. For certain items of fixed assets, records of specific location and particulars of assets are being updated.
The auditors of Autolite (India) have
expressed qualified opinion on multiple
counts. In spite of profit of Rs 84 lakh for
FY 2013, deferred tax assets were not
recognised on account of unabsorbed depreciation and carryforward of losses and other
timing differences under tax laws. As per
the company, there is no convincing evidence
to support that sufficient future taxable income will be available against which deferred
tax assets can be realised. Provision for current tax has been made for Rs 17.5 lakh, as
per provisions of the Income Tax Act, 1961.
Autolite credited Rs 3.1 crore in the earlier years and Rs 59.8 lakh in FY 2013 for
export incentives and other incentives in the
profit and loss account on an estimated basis. No payment was received against export

incentive. The concerned department has not


accepted the claim. The company is in the
process to provide the desired information.
Autolite entered into an agreement with
Anusika Industries in FY 2011 to recover
the advance given for job work of manufacturing head lamps for the exclusive use of
the company. Anusika is registered with the
Board for Industrial and Financial Reconstruction (BIFR). However, Anusika is still
doing job work for Autolite for the last 11
years. However, no amount was recovered
in FY 2013, according to the agreement. As
per Autolite, recovery of outstanding balance of Rs 5.6 crore is doubtful. Considering the uncertainty of the amount recoverable in the absence of a BIFR order, the
management has not made any provision.
Based on legal opinion, Autolite has
treated Rs 90 lakh as claim receivable on estimated basis from two parties. This was credited in the earlier years. In all, Autolites net
profit and shareholders fund would have been
reduced by Rs 10.3 crore if all these audit
qualifications were taken into consideration.
Further long-term loans and advances would
have reduced by Rs 5.6 crore and and other
non-current assets by Rs 4.7 crore.
Conclusion
Out of these stocks, a few are available at a
reasonably decent dividend yield of 3% and
above. Moreover, a few among these firms
such as JBM Auto, Jay Ushin, Harita Seatings and Bharat Gears are available at a discount to their BVs. However, this could be
a value trap and investors should have a
closer look at what auditors have to say
about their books of accounts.
S Khedekar
19

So do Indian leaders SEBI, Motilal Oswal Financial Services, J M Financial, IDBI, Angel,
HDFC Securities, India Infoline, Geojit BNP Paribas, DBS Cholamandalam and many more
India's Foremost Financial Web Content Supplier. The range of content supplied by us
is wide and varied:

Stocks

(BSE / NSE)

(Equity & Derivatives)

CM Live
News

Fundamental

IPO

Get Quotes
Stock Price Ticker
Online Price Analysis (Gainers/Losers)
Price Chart: Intraday & EOD
Volume/Value Toppers,
52-week High/Low, etc.
Corporate Announcements
Advances & Declines

(MCX / NCDEX)

Market Commentary
(Pre-, Mid-, and End Session)
Stock Alert
Hot Pursuit
Market Beat
Corporate News
Economy News
Other Market News
Result Announcements
Foreign Markets
Company Synopsis
Board of Directors
Quarterly Results
Balance Sheet
Profit & Loss
Share Price/Chart
(Monthly High/Low/Close)
Key Financial Ratio
Forthcoming IPO
Open Issues
Closed Issues
New Listing
Basis of Allotment
Draft Prospectus
New Issue Monitor

F&O

Gainers & Losers


Advances & Declines in OI
Highest/Lowest OI

Mutual
Fund

Fund/Scheme Profile
Daily NAV
MF Synopsis
Historical NAV
MF News & MF Activities
Dividend Details
Top 10 Holdings
NFO
Dividend Announcements

www.licnomuramf.com

Commodities

www.capitalfirstdirect.com

(Online Prices)

Others
Web
Tools

Live Commentary
Live News
Commodity Quotes
Gainers & Losers
Advances & Declines
Charts
Volume/Value Toppers

World Indices/ADR Prices


Forex Market
FII/MF Invesments

Thumbnail/Auto Grow Chart


Portfolio Module
Financial Planning Tools
Customised Applications
Fund Ranking
MF-SIP/Return Calculator

Youve put up a website.


Content is obvious...Demanding
and challenging. Turn to us.
Outsource content from a one-stop, reliable
supplier like us. It is the easiest way out, rather
than knitting bits and pieces of information
yourself. Your end-users gain a single-point access
to a wider range of up-to-date content for making
smarter investment decisions.
Ready content is served. Get the look and feel
customised to your need delivered and
activated in 48 hours.

Ask our 150 plus clients


Horizontal & vertical portals, financial
institutions, and online traders.

www.geojitbnpparibas.com

Two decades of credibility record in the finance industry:


Capital Market Publishers India Pvt Ltd
www.capitalmarket.com

www.adityabirlamoney.com

Manage your wealth online


with easy-to-use tools
Wealth Management Utilities
Cyber IPO
A content-rich IPO repository where
clients get all IPO details and comparisons
with similar other IPOs (pre- and post-IPO price
behaviour). They can then BID online.
Incorporates sub-broker and other partner
channels.

Analyst Tracker
Analyst Tracker is a simple-to-use organiser
for analysts to avoid scheduling conflicts
and keep track of corporate events. At a
glance analysts can keep abreast of their
past interaction with the company and,
importantly, their recommendations, tally
them with financials (sourced from
Capitaline database) and brace themselves to
sift fact from fiction at the next encounter
with the management. Dashboard ensures
quick and easy access to key company
related documents / information. Enables
the generation / creation of company reports /
internal analyst views in a standardized
format.

Analyst Scorer is a software package that


appraises analysts scientifically and objectively.
Use it to track the market outperformers in your
team!

Portfolio Tracker
Portfolio Tracker is a multi-portfolio, multi-asset,
online portfolio module. Monitors the multi-asset
portfolios of all your distributors/ clients from a
single login.

Content Management Utilities


Content Management System (CMS)
CMS is a web application framework ideal for
creating, deploying and managing interactive
web, intranet and extranet sites.

Document Repository System


The versatile multi-user document repository
system for publishing files/documents on the web
for a corporation or a small business can be used
to easily upload aesthetically designed web pages
on the website with minimum customisation.

Price Analysis Tool


e-Price

Analyst Scorer
Track analysts who consistently hit the
Bull's Eye!

A web-based tool with realtime price-watch


options. Watch portfolio prices from any corner
of the world!

C-MOTS INTERNET TECHNOLOGIES PVT. LTD.

ISO 9001 : 2008


certified
Database & Content Management, Content Integration, Technology Integrator,
Design & Development through Desktop Application, Web Solutions, Internet Solutions,
Knowledge Management, Testing, Hosting and Maintenance

E-mail: info@cmots.com

Sourcing, Syndicating and Technology Integrator:


C-MOTS Internet Technologies Pvt Ltd
www.cmots.com

InFocus

Benchmarks

Tale of two exchanges


Presence of large caps in the NSE Mid-Cap index boosts
its P/BV ratio compared with the BSE Mid-Cap index
The S&P BSE Sensex, the domestic stock
market barometer and widely tracked index
globally, reported an all-time high of 21960
during intra-day on 7 March 2014 and closed
at a historic high of 21,919. The Sensex consists of large-cap stocks, with Tata Power
being the smallest among the 30 constituents, with market capitalisation of Rs 18628
crore. The rally reported by the market was
largely on account of hopes that the National Democratic Alliance led by Narendra
Modi will come to power.
On 7 March 2014, the Sensex moved up
by 406 points, or 1.89%, reporting a historic high. However, there is no celebration
on the street or excitement in the air. This is
because the rally is concentrated in largecap stocks and that also confined to a handful of industries such as pharmaceuticals,
fast moving consumer goods and software.
Indeed, when the Sensex reported a new
high, the BSE Mid-Cap index declined
0.22% and and the BSE Small-Cap 0.21%.
Do small- and mid-cap stocks represent
value-buying opportunities? Is there a possibility of the present rally shifting from
large-caps to small- and mid-cap stocks? If
one looks at the index levels, small- and midcap stocks are too far away from their alltime peaks. Thus, the answer is in the affirmative. The BSE Small-Cap index is down
22

53.5% from its all-time high, while the BSE


Mid-Cap index is down 34.6%. It is clearly
evident that small- and mid-cap stocks have
remained on the sidelines.
Based on price to earning (P/E) multiple,
the Sensex is available at 18.1 as against P/E
of 8.1 for the BSE Mid-Cap index. The BSE
Small-Cap index is available at P/E of 70.8.
However, this is meaningless as several of
its constituents have reported massive losses

and, thus, on the smaller denominator, the


Small-Cap index looks expensive. Therefore,
in case of the Small-Cap index, one can rely
on the price to book value ratio (P/BV). The
Small-Cap index is available at P/BV of 1.11
compared with the Sensexs P/BV of 2.68
and the BSE Mid-Caps P/BV of 0.77.
There are a few interesting inconsistencies in the valuations that raise curiosity. In
terms of BV, the BSE Mid-Cap index is more
valuable compared with the BSE Small-Cap
index. Usually and logically, large-cap stocks
command premium valuations over the midand small-cap indices. Similarly, it is the
mid-caps that are expensive as against smallcaps. This is logical considering the risk attached to these three categories of stocks.
Large-cap stocks are better placed to
weather the economic gloom owing to their
strong balance sheets and deep pockets. On
the other hand, mid- and small-cap companies are more vulnerable to economic slowdown owing to their fragile financials.
The valuation matrix becomes more confusing if one looks at the indices of the National Stock Exchange (NSE). The CNX NSE
Nifty, the benchmark index of the NSE, is available at P/E of 18.38, which is at par with the
Sensexs P/E of 18.1. However, there is considerable quantum of drift between the valuations when it comes to the mid-cap stocks.
At P/E of 14.65, the NSE Mid-Cap index is far more expensive compared with
the BSE Mid-Cap index at 8.14. Even based
on the P/BV ratio, the NSE Mid-Cap index
is expensive at 1.71 as against the BSE MidCap indexs P/BV of 0.77.

Divergence
The CNX NSE Nifty, available at P/E of 18.38, is at par with the S&P BSE Sensexs P/E
of 18.1. However, there is considerable drift between the valuations of the mid-cap indices

Index level
52-week high
52-week low
All-time high
All-time low
P/E
P/BV
DY (%)
No of companies
Market cap (minimum)
Market cap (maximum)

SENSEX

NIFTY

BSE
MID-CAP

CNX
BSE
CNX
MID-CAP SMALL-CAP SMALL-CAP

21,919.8
21,960.9
17,448.7
21,960.9
947.1
18.10
2.68
1.36
30
18,628.8
438,974.1

6,526.7
6,537.8
5,118.9
6,537.8
284.0
18.38
3.09
1.43
50
9,675.1
438,895.7

6,693.4
6,802.6
5,118.7
10,245.8
2,547.9
8.14
0.77
1.70
216
594.0
15,503.0

8,126.2
8,242.7
6,330.8
9,853.5
2,930.8
14.65
1.71
1.68
99
576.8
52,098.0

6,612.5
6,716.8
5,085.6
14,239.2
2,864.2
70.81
1.11
1.52
437
65.2
3,119.5

3,427.2
3,506.1
2,509.0
3,925.4
2,509.0
45.54
0.97
1.75
101
237.3
10,726.6

Index level is closing as on 7 March 2014. P/E: Price to earning. P/BV: Price to book value. DY: Dividend yield.
Market cap (minimum) and market cap (maximum) are in Rs crore. This represents the minimum and maximum market cap of respective index
constituents. In case of the S&P BSE Sensex, the market cap (minimum) refers to Tata Power and the market cap (maximum) refers to TCS.
Source: BSE, Capitaline

Mar 17 - 30, 2014 CAPITAL MARKET

InFocus
Controlling information
Data about index constituents like weight are not available on both the NSE
and the BSE web sites
To remain competitive, the BSE
There is increasing trend of stock
exchanges selling data, whether it is the
and the NSE have launched a slew of
indices like broader and industryNational Stock Exchange (NSE) or the
specific indices. Among them, indusBombay Stock Exchange (BSE). On one
try-specific indices actually make a
hand, capital market regulator Securities
mockery of the very concept of index.
and Exchange Board of India is nudging
companies to disclose more information,
In case of the real estate or consumer
durables index, a couple of companies
while, on the other hand, the BSE and
can swing their fortunes. The domestic
the NSE are progressively curtailing data
market lacks depth. However, in
available on their websites. The stock
addition, lack of data on the indices
exchanges view this as an opportunity
makes life difficult for investors.
to garner additional revenue.
In the country, where equity culture
is non-existent, stock exchanges should
encourage investment in equities. In this
endeavor, easy availability of information is a key. Ironically, the BSE and the
NSE are going exactly the opposite way.
For instance, historical data on
various indices are available for a
maximum of five years on the BSE
website. Data about index constituents
like weight are not available on both the
NSE and the BSE web sites.
Where is the visibility?
In case of the BSE, mid caps are available at 23% discount to their BVs or net
worth. On the contrary, on the NSE, mid
caps are quoting at a premium of 71%.
Similar, is the case with the small-cap
counters. The BSE Small-Cap index is
commanding a premium of 11% to its BV,
while the NSE Small-Cap index is available at a discount of 3%.
Again the question is whether mid-caps
hold greater value compared with the largecap stocks. As per the BSE, mid-caps are
available at discount to their BVs, while the
NSE data reveal exactly the opposite. Which
is correct? Data thrown by these two stock
exchanges is confusing. The answer is hidden in the index constituents or the index
composition (see table: Divergence).
In the BSE Mid-Cap index, the most
valuable company is Aurobindo Pharma,
with market cap of Rs 15502 crore, while
in the NSE Mid-Cap, Hindustan Zinc is
the most valuable stock, with market value
of Rs 52097 crore, followed by Bharti
Infratel (Rs 39025 crore) and Adani Ports
(Rs 37084 crore). The question in case of
the NSE Mid-cap index is whether it is
fair to classify these companies as midMar 17 - 30, 2014 CAPITAL MARKET

cap stocks considering the fact that the


least valuable stock in the Nifty is JP Associate (market value of Rs 9675 crore)
and IDFC (Rs 15738 crore).
In the NSE Mid-Cap index, there are 21
stocks with market value exceeding Rs 15550
crore. Clearly there is a mis-match between the
index constituents that is resulting into jumbled
valuation. Ironically, identical set of companies,
ones that matter by of market capitalisation,
are listed on both these stock exchanges.
Also, in the NSE Small-Cap index, Adani
Power is the most valuable stock with market
of Rs 10726 crore, which is again on the higher
side compared with JP Associate (market value
of Rs 9676 crore), a Nifty constituent.
Compared with the BSE Small-Cap index, with Hatsun Agro being the most valuable firm, with market cap of Rs 3119 crore,
the NSE Small-Cap index has 25 companies
that are more valuable than Hatsun.
The composition of the index has a significant bearing on its valuation. A couple of
large companies can greatly influence the valuation and reveal a misleading picture. Presence
of large-cap stocks in the NSE Mid-Cap index
is one of the reasons for the high P/BV ratio
compared with the BSE Mid-Cap index.

Indeed, a few good quality large-cap


stocks are trading at premium to BV are lifting the NSE Mid-Cap indexs P/E ratio. As
is evident, the NSE Mid-Cap constituents
like Hindustan Zinc (P/BV of 1.62), Bharti
Infratel (P/BV of 2.19), Adani Ports (P/BV
of 5), Adani Enterprises (P/BV of 3.2), Oil
India (P/BV of 1.52) and Oracle Financial
Services Software (P/BV of 3.48) are giving
a big push to the overall P/BV of the NSE
Mid-Cap index.
In terms of logic, the valuation of the
NSE indices the Nifty, Mid-Cap and
Small-Cap seem fair. Here, the large caps
are valuable compared with the mid caps
and the mid caps are commanding a premium compared with the small caps in terms
of P/BV. However, the composition of the
indices reveals that, in reality, the BSE indices are better constructed and maintained
compared with thereof the NSE.
For investors, the question is not who is
right or who is wrong. Investors need quality
indices that to rely upon. Anyway, the Sensex
hitting historic highs could make headlines
but the market sentiments continue to remain
fragile and subdued with several mid- and
small-cap struggling in the trading ring.
Thanks to the bloodbath subsequent to
the filing for bankruptcy by US investment
bank Lehman Brothers in 2008, small individual investors have deserted the market. The
market had never recovered in the true sense
post-Lehman crisis. Now it seems this particular species is on the verge of extinction.
Conclusion
Let the BSE and NSE nurture and water their
rivalry. It is good for the markets and investors. But at least when it comes to the lead
indices, these two rivals should co-ordinate
and provide quality indices that investors
can rely on. At present, the mid-cap indices
of the BSE and the NSE provide a contradictory picture. Certainly both cannot be
right. Besides a periodical review and maintenance of the indices is a must to provide
correct picture of the market sentiments.
This is something seems to be lacking at
least in case of NSE.
The BSE and the NSE are close competitors and can be seen teasing each other at
every given opportunity. However, at least
in terms of data, both seem to be teasing the
investors and market. They should work together to remove or minimize the confusion
about mid- and small-cap valuation.
S Khedekar

23

InFocus

Developed markets v emerging markets

Problems v results
The valuation of Indian stocks is cheaper compared with those
in developed economies despite both facing balancesheet woes
Emerging markets (EMs) are struggling. This
trend is across asset classes of equity, debt
and currency. The Bank of America Merrill
Lynch (BofA-ML) Fund Manager Survey for
February 2014 provides some interesting insights and broader future trends. Growing
fears of a hard landing for Chinas economy
have further marginalized EM equities, says
the survey. However, sentiment toward developed world equities remains positive.
As per the survey, optimism towards
Europe and the US remains strong, while
allocations to global EMs have reached a
record low, with a 29% of asset allocators
are underweight on the region. A record 40%
of the global investor panel says that the
eurozone is the region they most would like
to overweight in the coming 12 months. US
equities are becoming more popular, with
11% of asset allocators overweight on the
US compared with 5% a month ago.
These are certainly not positive indicators for investors in EMs. However, valuations favour EMs. Also, this seems to be a
short to medium term trend if one looks at
the hardcore numbers. Moreover, there are
contradictions that are amply visible.
The war of words between developed
economies and EMs makes interesting read.
The Reserve Bank of India (RBI) governor,
Raghuram Rajan, has been quoted as saying
24

the US should keep in mind the impact of


its policies on the rest of the world in January 2014. He was referring to the US tapering and its effect on the EMs in particular.
The US Federal Reserve had started tapering the bond-buying programme worth
US$ 85 billion per month in December 2013.
The Fed had reduced the quantum by US$ 20
billion in two installments to US$ 65 billion
by January 2014. The Fed is expected to further curtail it and eventually wrap it up.
German finance minister Wolfgang
Schaeuble has counter-argued by saying EMs
should get their houses in order before demanding solidarity from other nations. Since the
taper talk began in May 2013, equity, bonds
and currency markets of the EMs are in trouble
and looking west in fear. Worse, the future
direction continues to be hazy and volatility
could be the norm for the rest of 2014.
Schaeuble had termed the EM trouble
as home-grown and advised EMs to carry
out structural reforms. The words of advice
from Schaeuble are prudent but highlight the
double standards of the developed world.
For instance, one of the key reasons for
the economic and financial troubles faced
by the European Union (EU) is the huge
trade surplus commanded by Germany compared with the other EU countries. This
adversely impacts economic growth of the

EU region. Now what has Germany done


do tackle this structural issue within the EU
over the last several years? The largest
economy in the Europe reported a trade surplus of euro 202.7 billion in calendar year
(CY) 2013 an all-time record high. This
debate highlights the nuisance between Germany and rest of the countries with contradictory profiles in global trade.
Also, Rajan said in an interview that international monetary co-operation has broken
down. What he has said or rather demanded is
not wrong in globalize and liberal business
environment. Businesses should always be
mutually beneficial to all for it to sustain and
thrive. It cannot remain a one-way street.
EMs are underperforming the developed
economies. In calendar year, India (12.91%),
Brazil (negative 21.42%), Russia (negative
24.36%), China (negative 11.46%) and South
Africa (23.4%) have underperformed the US
and Germany. The Dow Jones Industrial Average of the US reported gain of 14.8% and the
Dax of Germany 17.8%.
However, if the EMs are feeling the tremors and at the receiving end because of the US
tapering, the same would be the case with the
developed world as well. It is just a matter of
time. What is so extraordinary about the US
economy that the Dow Jones is flirting with
its all-time high but for the liquidity or easy
money regime in the US and Europe? The
Dow Jones is currently at 16,452.72, just
about 135 points, or 1%, shy of its historic
high reported in December 2013.
If liquidity has influenced stocks and
currencies in EMs so has it in the developed
world. The real problem for EMs is the shallow nature of their markets. In India a billion-dollar here and there could make the
market swing wildly.
What exceptional feat has Germany
achieved that Dax, its equity benchmark, reported an all-time high of 9,743 in January
2014? As per the International Monetary
Fund (IMF) estimates, Germany is expected
to grow 1.6% in CY 2014 and 1.4% in CY
2015 compared with 0.9% in CY 2012 and
0.5% in CY 2013. Though these number
looks impressive, there is nothing to cheer
about. In comparison these growth numbers
are far from impressive. The euro area is
likely to clock growth of 1% in CY 2014
and 1.4% in CY 2015 compared with the
negative growth in the last two years.
The Dax continues to rule firm and just
4% away from its historic high. Is their any
relationship between equities and economic
Mar 17 - 30, 2014 CAPITAL MARKET

InFocus
Growth story at a discount
The S&P BSE Sensex crossed its all-time high in March 2014, commanding P/E of 18.1
compared with 28 when the Sensex had hit a historic high during the bull-run in January 2008

INDEX

COUNTRY

INDEX

52-WK
LOW
HIGH

ONE YEAR
CHANGE

P/E

CAC 40

France

4,366.42

3,575.00

4,431.00

13.82%

24.9

Sensex

India

21,919.79

17,449.00

22,024.00

12.91%

18.1

Dow Jones Industrial Average

US

16,452.72

14,373.00

16,588.00

14.80%

15.8

Nasdaq Composite Index

US

4,336.22

3,155.00

4,372.00

33.40%

24.7

FTSE 100
Euronext 100
DAX
Swiss Market Index
S&P 500
Bovespa Stock Index
TSX 60
Santiago Index IPSA
IPC
ASX All Ordinaries

UK

6,712.67

6,023.00

6,876.00

4.09%

30.9

Europe

822.35

675

833

14.90%

25.3
21.9

Germany

9,350.75

7,418.00

9,794.00

17.80%

Switzerland

8,378.58

7,247.00

8,544.00

8.50%

22.4

US

1,878.04

1,536.00

1,884.00

21.00%

19.7

Brazil

46,244.07

44,107.00

59,031.00

-21.42%

7.0

Canada

818.55

678

821

11.10%

16.2

Chile

3,119.05

2,842.00

3,911.00

-31.10%

*15.3

Mexico

38,913.04

37,034.00

44,467.00

-12.80%

*22.64

Australia

5,477.01

4,611.00

5,477.00

6.21%

17.4

China

2,057.91

1,850.00

2,352.00

-11.46%

*10.22

Hang Seng

Hong Kong

22,660.49

19,426.00

24,112.00

-1.48%

1.6

Nikkei 225

Japan

15,274.07

11,806.00

16,320.00

22.01%

*42.48

TSEC 50 Index

Taiwan

8,713.96

7,663.00

8,719.00

8.60%

*24.03

RTS

Russia

1,164.63

1,087.46

1,556.58

-24.36%

*4.67

JSE FTSE Top 40

South Africa

47,786.77

37,717.78

48,002.23

23.40%

*19.75

Kospi

South Korea

1,974.68

1,771.00

2,063.00

-2.57%

*25.98

Shanghai SE Composite Index

*P/E based on end January 2014 closing. Index (current) represents index closing as on 7 March 2014.
Source: CNN Money, FT, Sebi

performance? It is different story if the


debate is about whether the link ever exists.
But the economic woes of the EU members continue. Internal trade imbalance, economic slowdown with no major expected upturn, and fragile balance sheets of member countries mar the EU. Against in this background,
the Euronext 100 reporting a one-year gain of
14.9% and commanding price to earning (P/E)
multiple of 25.3 makes little sense. The
Euronext 100 is the blue chip index of the
Euronext NV and includes companies from
different countries within the Europe.
However, the present economic stability is a welcome relief for the EU. Besides
the developed economies have reported better numbers and the short-term outlook has
turned positive. But the medium- to longterm growth outlook remains an issue considering the mature and saturated markets.
As per the IMF estimates, the advanced
economies are expected to strengthen and
grow at 3.7% and in CY 2014 and 3.9% in
CY 2015. This is far better compared with
Mar 17 - 30, 2014 CAPITAL MARKET

the 3.1% growth reported in CY 2012 and


3% in CY 2013. In comparison, EMs markets and developing economies are projected
to clock flattish growth of 5.1% in CY 2014
and 5.4% in CY 2015 as against 4.9% in CY
2012 and 4.7% in CY 2013.
The economic slump in China has
emerged as another crucial risk for the global
financial markets. China is likely to report
economic growth of 7.5% in CY 2014 and
7.3% in CY 2015. China reported economic
growth of 7.7% in CY 2012 and CY 2013 as
well. A slowing down dragon is certainly
not good news for commodities but could
cushion user industries.
According to the World Economic Outlook report release in January 2014 by the
IMF, a new risk of very low inflation in the
advanced economies, especially the euro, area
has emerged. In case of EMs and developing
economies, the report warns of potential
capital flow reversals.
The developed world is commanding superior valuations compared with several EMs:

France (P/E 24.9), Germany (21.9) and UK


(30.9) are far too expensive compared with
India (18.1), Brazil (7), China (10.22) and
Russia (4.67).
Thus, long-term investors should not read
too much into the messy political environment or fiscal indiscipline that exists in EMs.
This is because the developed world is no different. Indeed, the developed world is source
of trouble and misery for the global markets. It
is EMs that have suffered owing to the contango effect of the troubles originated in the
developed world, be it the US mortgage crisis
or Euro zone crisis. Moreover, the manipulation of the London inter-bank offer rate (Libor)
by some staff of the Bank of England is the
latest instance of governance standards in developed economies.
Besides, the balancesheet trouble is not
EM-specific. Just a couple of years ago,
multiple EU members where on the verge of
collapse. It is the US who puts pressure on
the credit rating agencies to keep its sovereign rating on the top. India does not enjoy
this privilege. On the contrary, it is the credit
rating agencies that are dictating terms to
New Delhi and scaring it with potential
downgrade every now and then.
Anyway this fear is good for India over
the long term. But what about the US, the
economic growth engine of the world? Rather
than India, the credit rating agencies should
worry about the US and its fiscal health well
before it becomes obvious to all and sundry.
Every other economy seems to be in
trouble. It makes little sense to point fingers at
each other. Whether it is the chaotic and squabbling democracy that is India, sovereign default by EU member countries or the US president struggling with debt ceiling limits financial and political troubles are everywhere.
Therefore, the economic slowdown witnessed by several EMs should not be seen
as shocker or surprise. What is more important is the promise it holds. This promise of
economic growth is coming at a discount
compared with the mature markets.
The S&P BSE-Sensex, the Indian equity
market barometer, is at its all-time high and
commanding P/E of 18.1. Interestingly, when
the Sensex had hit historic high during the
bull-run in January 2008, it traded at P/E
valuation of 28. The numbers clearly favour
India. The Indian market seems like a mega
bargain sale for long-term investors particularly foreign investors in comparison with
the matured developed markets.
S Khedekar

25

InFocus

Momentum stocks

Stepping on the gas


Not all stocks outperforming the market consistently for long
periods are investment-worthy
Information is critical while taking investment
decisions such as buy, sell or hold. There is
deluge of data. Broadly, the data and information available to investors include financial results and related commentary released
quarterly and annually. News and updates
can be tracked based on announcements submitted to the stock exchanges apart from
other sources such as newspapers and
websites. Data on trading primarily include
statistics such as share price, trading volume,
delivery, and shareholding pattern.
Each and every bit of information available to investors has its own significance.
They can use it to validate or discard their
view on a stock. Further, investors can screen
thousand of companies and pick and choose
those that are suitable to their risk profile.
However, data analysis has its limitations.
Data can throw unexpected results. One can
deploy any number of filters on data to figure out strong companies. But it is not necessary that good quality companies will emerge
after an exhaustive filtering exercise on a vast
database. Besides, data are about past, which
is more or less discounted in the current price.
Historical data can provide limited or no insight into the future.
However, data can certainly help to spot
trends. For example, a simple query on gainers and losers based on industries over a
period of time can provide hints about which
26

way the wind is blowing. Investors can spot


sectors that are delivering superlative return
ones those that are trailing the market.
Investors and the market are always looking for companies that are making smart
moves on the trading floor. This could be
based on their financial performance or on
some positive announcement. Even the
uptick could be due to element of manipulation. Investors chase companies with some
exciting stories that can enable them to
emerge as multi-baggers in future. But how
to spot such companies remains illusive.
There are many ways to shortlist com-

Buzzing
L&T bagged Rs 1000-crore hydrocarbon
services orders in January 2014 and Rs 5220crore construction orders and Rs 1550-crore
Oman road project order in February 2014
140
120
BSE Sensex
100
80
60

Larsen & Toubro


11 A
Mar
2013

Base=100 as on 07 March 2013


Face Value: Rs 2.

Jan
2014

10
Mar
2014

panies where action can be seen. The usual


indicators based on trading data include stocks
with high delivery, high volumes, sharp and
significant rise in price and so on. Capital
Market made an attempt to spot momentum
stocks based on price data. The idea was to
pick stocks that are outperforming the market on a regular basis. However, instead of
taking into consideration point to point gain
or loss, daily outperformance against the
benchmark was selected as the primary yardstick. Out here, the S&P BSE Sensex is considered as the market benchmark.
Starting off with the top 500 companies
based on market capitalisation, the share
prices for the latest 31 trading sessions were
considered for quick analysis. Data covered
the period between 21 January 2014 and 5
March 2014. Daily gains and losses for these
500 stocks were determined. Subsequently,
the return was compared with the Sensex to
determine the outperformance or
underperformance. Last, companies were arranged in a descending order of outperformance. That is, companies with maximum
instances of outperformance were at the top.
Among these 500 companies, Priti Mercantile Company emerged on the top. The
stock outperformed the Sensex on 25 occasions out of 30 trading sessions. Priti was
closely followed by PS IT Infrastructure &
Services and Rander Corporation, with
outperformance on 24 occasions, and PC
Jeweller with better show on 22 days.
Is there anything special about these stocks?
Priti is having a blast on the trading floor. The
company has moved up by almost 50% over
the last 30 trading sessions. Indeed, outperforming the market on 25 out of 30 trading days is
something exceptional considering the fact that
it is the only stock to achieve the feet.
Lately, Priti had made a couple of positive announcements. In an extraordinary general meeting held on 27 February 2014, the
company approved a bonus issue in the ratio of eight new shares with face value of Rs
5 for 10 shares held. Also, it increased the
authorized share capital from Rs 15 crore to
Rs 25 crore by altering the memorandum of
association. Last, Priti approved issuance
of five lakh warrants convertible into equal
number of equity shares on a preferential
basis to promoters at Rs 500 per share including premium of Rs 495 per share. This
is as per the regulations prescribed by the
Securities and Exchange Board of India (Sebi)
and listing agreement with stock exchanges.
Though these announcements by Priti
Mar 17 - 30, 2014 CAPITAL MARKET

InFocus
Momentum stocks
33 companies outperforming the S&P BSE Sensex 18 times or more out of the latest 30 trading sessions

COMPANY

CMP OUT- CHNGE


(Rs) PERFO* (%)

Priti Mercantile Company


701.6
PS IT Infrastructure & Servic 535
Rander Corporation
69.95
PC Jeweller
104.55
Adani Ports & SEZ
176.2
Amtek Auto
102.1
GRUH Finance
271.1
Larsen & Toubro
1123.3
ONGC
300.25
Allcargo Logistics
153.95
Bharti Infratel
199.95
eClerx Services
1284.75
Entertainment Network
397.8
Glenmark Pharmaceuticals 576.8
Risa International
1131.9
UltraTech Cement
1894.25
Bharat Forge
396.6
Bharat Petroleum Corp
386.6
Container Corporation
800.4
EIH
63.9
Exide Industries
115.5
Fag Bearings
1794.4
Hatsun Agro Product
299.1
Mayur Uniquoters
482.85
Persistent Systems
1123.5
Power Finance Corporation 165.5
Sadbhav Engineering
91.4
Tata Elxsi
656.15
Tata Investment Corp
487.55
Tech Mahindra
1901.65
Va Tech Wabag
677.65
Vinati Organics
276.25

25
24
24
22
20
20
20
20
20
19
19
19
19
19
19
19
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18

49.3
54.1
18.1
34.8
19.5
43.8
4.7
11.1
4.6
12.7
20.1
12.6
17.3
14.8
63.2
11.4
14.5
14.6
10
11.2
12.5
16.7
41.7
37
13.4
12.4
6.7
71.1
21.8
4
33.2
26.9

MKT CAP
(Rs cr)
1877.5
2876.2
863.2
1872.5
36474.3
2231.9
4874.4
104118.7
256878.3
1945.9
37769.2
3865.8
1896.3
15642.8
3610.8
51947.9
9232.9
27954.3
15605.4
3652.2
9817.5
2982.3
3221.3
1045.9
4494
21846.7
1385.6
2043.3
2686.4
44378.8
1802.6
1363.3

52-WEEK
HIGH
LOW
(Rs)
(Rs)
769
535.1
71.9
134.5
178.6
103.6
282.5
1152.4
353
166.8
214
1370.1
402
612
1170
2066.3
402.2
428.5
825
65.8
143.3
1802
325
496
1158.1
209.5
129
668.6
505
1930
688
279.5

P/E

DY
(%)

99.6 1502.1
12.3 361.15
14.9
542.3
66
6.43
118
19
58.7
5.93
188
29.29
678.1
22.57
234.4
10.61
60
12.58
126.1
28.34
599
16.15
198.1
21.56
458
23.49
183 1097.46
1405
20.72
185.6
43.02
256
14.05
636.7
16.77
43.3
67.55
99.1
17.87
1100
24.48
81
38.46
200
20.44
477
19.21
97.4
4.93
52
0
156.1
34.9
347.6
15.45
895.3
16.79
380.7
17.62
74
17.04

0.04
0
0.1
0.96
0.55
0.62
0.92
1.09
3.16
0.97
2.65
1.93
0.25
0.41
0
0.48
0.86
2.95
1.46
1.52
1.39
0.28
0.57
0.91
0.8
4.23
0.65
0.76
3.28
0.14
1.03
0.91

P/BV

TTM CHG IN
RPAT TTM PAT
(Rs cr)
(%)

69.44
1.3
51.54
8
47.05
1.6
1.35
355.2
4.1 1920.2
0.36
429
8.62
166.4
3.08 4649.3
1.68 20594.5
1.1
154.6
2.06 1332.8
6.51
239.4
3.52
87.9
5.48
666
105.17
3.3
3.41 2032.7
4.09
331
1.67 4789.8
2.51
964.6
1.54
85.6
3.23
501.4
3.02
121.8
18.14
83.8
7.49
51.2
3.89
234
0.9 5300.5
1.14
81.7
9.1
58.6
1.31
179.5
5.97 2791.8
2.32
102.3
4.93
80

-8
LP
137.3
NA
66.6
52.5
20.3
-7.8
-11.2
-27.9
43.5
55.6
40
11.3
LP
-27.3
6.6
164.9
2.5
24
-3.4
-23.5
102.3
22.2
32.2
34.4
-25.3
173.3
5.1
355.4
13.3
18.6

YEAR
END
201303
201303
201303
201303
201303
201206
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303
201212
201303
201303
201303
201303
201303
201303
201303
201303
201303
201303

TOTAL DEBTDEBT EQUITY


(Rs cr) RATIO
67.8
3.2
0
233.1
11585.8
8917
4911.5
65947.7
20737.9
731.3
3229.6
0
0
2764.9
0.6
7342.3
2784.5
33156.9
38.5
744
51
0
402.4
24.8
1.4
139582.7
4564.2
58.5
0
1380.4
82.2
237.3

2.2
0.06
0
0.42
2.54
1.08
9.97
1.74
0.13
0.48
0.2
0
0
0.96
0.02
0.47
1.16
1.88
0.01
0.27
0.01
0
3.13
0.14
0
5.56
3.15
0.24
0
0.26
0.15
0.96

* Outperformed (No of days). CMP (current market price) as on 5 March 2014. NA: Not available. Consolidated figures wherever available. LP: Loss to profit. Change (%) refers to change over the last 30 trading sessions. P/E:
Price to earnings ratio. DY: Dividend yield (%). P/BV: Price to book value. TTM ended December 2013. TTM RPAT (Rs cr): Trailing 12-month reported profit after tax. Change in TTM PAT is over the previous corresponding period.
Source: Capitaline Database

sound exciting, there is not much to cheer


about its profit and loss (P&L) account and
balance sheet. At the current market price of
Rs 701.6, the company, registered with Reserve Bank of India as a non-banking finance
company (NBFC), is available at a price to
book value (P/BV) ratio of 69.44 with its
BV per share at mere Rs 9.9 at the end of the
financial year closing on 31 March 2013 (FY
2013). Further, it reported profit of Rs 1.44
crore on turnover of Rs 8.45 crore in FY
2013. The stock is clearly overvalued at price
to earning (P/E) multiple of 1502.
PS IT Infrastructure is a similar case,
with weak financials and sky high valuations. The stock is available at a P/E multiple of 361 and P/BV of 51.5. The company reported profit after tax of mere Rs 4
lakh on turnover of Rs 143.2 crore in FY
2013. Rander Corporation is no exception.
The stock posted profit of Rs 95 lakh on
Mar 17 - 30, 2014 CAPITAL MARKET

total turnover of Rs 1.85 crore in FY 2013.


On the bright side, PC Jeweller reported
32% jump in turnover and 31% rise in profit
in the nine months ended 31 December 2013.
In January 2014, the company announced interim dividend of 15% or Rs 1.5 per share. It is
available at a reasonable P/E of 6.4. This is
despite the 34.8% surge reported by the stock
in the last 30 trading sessions. PC Jeweller
came out with an initial public offering (IPO)
in FY 2013. The IPO was priced at Rs 130 per
share including premium of Rs 120 per share.
At the current market price of Rs 104.5, the
stock is available at a discount of 19.6%.
A bonus issue added zing to engineering
& construction conglomerate Larsen &
Toubro (L&T) in FY 2013. Now it is the
consistent flow of orders that is keeping the
stock buzzing, enabling it to beat the Sensex
20 out of 30 trading sessions. The Mumbaibased company bagged orders like onshore

and offshore services in hydrocarbon (Rs


1000 crore) in January 2014. It received orders worth Rs 5220 crore in construction and
another worth Rs 1550 crore for a road project
in Oman in February 2014. The order book
was at Rs 171184 crore end December 2013,
a rise of 13% over a year ago. This is a healthy
increase in orders considering the gloomy economic and business environment.
Over the last 30 sessions, Amtek Auto
reported a surge of 43.8% and outperformed
on 20 trading days. The company took several major initiatives in the last two years.
For instance, it acquired Neumayer Tekfor
in Germany and JMT Auto in India. On the
other hand, Amtek sold 56% equity stake in
Amtek Ring Gears and in Amtek Crankshaft
India. These two businesses had relatively
lower profit margin. Amtek Auto has already
completed integration of Neumayer Tekfor.
The company is among the largest integrated
27

InFocus
component manufacturer, with manufacturing facilities spread across the world.
Gruh finance, a subsidiary of HDFC,
moved north by 4.7%. The housing finance
company has managed to outperform on 20
occasions. Steady performance continues to
be its specialty. Revenue increased 26.3% and
profit 20.2% in the TTM ended 31 December
2013. Its loan portfolio rose 31% to Rs 6544.6
crore on 31 December 2013 over a year ago.
Similar is the case with Adani Ports &
Special Economic Zone. The stock beat the
Sensex 20 out of 30 trading sessions. The
companys turnover spurted 36%. Even
more impressively, the bottom line jumped
66.6% in the TTM ended 31 December
2013. Its port at Mundra continues to hold
the number one position among all commercial ports by cargo by handling (74.73 million tonnes or mt) in the period April to
December 2013, outperforming the Kandla
Port, which handled 66.08 mt. Adani Port
develops, operates and maintains ports and
related infrastructure facilities including a

multiple-purpose special economic zones.


Countrys leading telecom tower infrastructure company Bharti Infratel is another buzzing stock, which delivered little over 20% gain,
outperforming in 19 sessions. The company
signed an agreement with Reliance Jio Infocomm,
a subsidiary of Reliance Industries, in March
2014. Reliance Jio holds pan-India unified license and will be utilising the telecom tower
infrastructure of Bharti Infratel to launch its
services across the country. This deal is medium- to long-term positive for Bharti Infratel.
Tata Investment Corporation (TIC) reported almost 22% gain and outperformed
the market on 18 occasions. It is undervalued
compared with its net asset value (NAV). The
stock is available at 40% to its NAV of Rs
815 at the close of December 2013. TIC acts
as an investment company and primarily
holds shares of blue-chip Tata group companies. It is true that the investment company
is generally available at discount to its NAV.
Therefore, the present rally in large-cap stocks
with the Sensex hitting an all-time high in

March 2014 argues well for the company.


Conclusion
There could be several reasons on the basis
of which a stock could be outperforming the
overall market. There could be corporate action like bonus, robust performance, undervaluation, new businesses, and business tieups. Investors can treat these stocks as a starting point for exploring them for investment.
However, investors should strictly stay
away from those where the reasons for
outperformance are not clear. Besides, avoid
stocks with apparent price manipulation,
evident from a fragile balance sheet and P&L
account but sky-high valuations. Investors
could be better off focusing on mid- and
large-cap stocks with proven track record.
Last, investors should try to figure out
whether the momentum witnessed is just a
short-term phenomenon or likely to sustain.
In turn, investors should focus on long-term
stories rather than sporadic spurts.
S Khedekar

IPOCentre
Loha Ispaat / CM Rating 35/100

if the steel and other user industries do not


grow, the customer base can continue to expand.

Working capital-intensive

Weaknesses
 The business is low tech, low value-addition, and volume-driven.
 Risks include raw material price fluctuations, customer default, high working capital requirement, high inventory and a very
thin margin. The profit after tax (PAT) margin hovers around 1.7-2%.

The low tech, low value-addition, volume-driven business


requires lot of working capital
Loha Ispaat is as an independent steel
service centre (SSC), acting as an intermediary between primary metal producers, who generally sell large volumes of
limited size and configurated products
and end-users requiring economical
quantities and customized products. The
company offers a variety of sizes, grades
and standards of steel processed according to customer specifications. It purchases raw materials like hot rolled, cold
rolled, and cold rolled closed annealed
coils, sheets and plates from steel manufacturers and converts them into various shapes and forms through de-coiling, re-coiling, slitting, pickling, oiling,
roll forming, and cutting.
The net proceeds of this issue and the
pre-IPO placement funds will be utilised to
meet the working capital requirement of the
Khopoli and Taloja plants in Maharashtra
28

ISSUE HIGHLIGHTS
Offer size (in Rs crore)
- On lower price band

205.63

- On upper price band

213.64

Offer size (in no. of shares )

2.67 crore

Price band (Rs)*

77-80

Post issue capital (Rs crore)

101.0

Post-issue promoter shareholding (%)70.1


Issue open date

11/3/2014

Issue closed date

20/03/2014

Listing

BSE,NSE

post expansion. The funds will take care of


the working capital requirement till FY 2015.
Strengths
 Of the total flat steel consumed in India, only
about 13% gets routed through SSC in India as
against about 60% internationally. Hence, even

Valuation
Consolidated net sales were Rs 3429.02 crore
and PAT Rs 70.45 crore in the fiscal ended
March 2013 (FY 2013). Consolidated net
sales stood at Rs 2021.65 crore and PAT Rs
38.90 crore in H1 of FY 2014. On fully diluted post-IPO equity share capital of Rs
101 crore, EPS for FY 2013 was Rs 7 and
annualised H1 of FY2014 EPS Rs 7.7.
At the lower price band of Rs 77, the
offer price discounts FY 2014 annualised
earning by 10 times and at the higher price
band of Rs 80 by 10.4 times. There is no
listed comparable player with focus on the
SSC business. Such low value-addition and
high working-capital-intensive business deserves P/E lower than 10.

Mar 17 - 30, 2014 CAPITAL MARKET

StockAlert

Orchid Chemicals and Pharmaceuticals

In the woods
The loss-making and debt-ridden company with several
adverse auditors remarks hopes to gain from sale of assets
Orchid is described by the Oxford
Dictionary as a plant with complex flowers
that are often showy or bizarrely shaped,
having a large specialized lip and frequently
a spur. This description is very much
relevant to Orchid Chemicals &
Pharmaceuticals.
The
Chennai-headquartered
pharmaceutical
procedure
active
pharmaceutical ingredients (APIs) and
formulations is struggling. It is making losses
and reeling under huge debt. The statutory
auditors of the company have raised several
issues, putting a question mark over the
quality of the books of accounts. Moreover,
the company has either not responded or
has given unconvincing responses. On the
positive side, it is expecting windfall gains
from the impending sale of assets, which
will help to significantly cut debt.
Orchid came out with its annual report
for the 18 months ended 30 September 2013
end February 2014. Earlier, the company
used to close its books of accounts in March.
It has put forth sale and transfer of its unit
as a reason for the extension. From here on,
Orchid will be closing its books of accounts
as on 31 March 2014. As per the new
Companies Act, 2013, a company is required
to close its books of accounts in March every
year. This is in bid to introduce

Mar 17 - 30, 2014 CAPITAL MARKET

standardisation in the financial reporting.


In August 2012, Orchid had entered into
a business transfer agreement (BTA) with
Hospira Healthcare India Pvt Ltd, a
subsidiary of Hospira Inc, USA, for sale
and transfer of its penicillin and penem API
business together with the manufacturing
facilities in Aurangabad and an associated
research and development (R&D) unit
situated at Shozhanganallur, Tamil Nadu. It
obtained the approved of the shareholders
in October 2012, the Competition
Commission of India (CCI) in December

In the crossfire
IDBI Bank wants to convert Rs 30.1-crore
loan to Orchid Chemicals and Pharma
into equity shares. Three-fourth of
promoters 32.28% equity stake is pledged
140
120

BSE Sensex

100
80
60
40

Orchid Chemicals and Pharmaceuticals


07 A
Mar
2013

Base=100 as on 07 March 2013


Face Value: Rs 10.

Jan F 10
2014
Mar
2014

2012, and the Foreign Investment Promotion


Board in January 2013.
Subsequently, the initial consideration
of US$ 202.5 million was enhanced to US$
217.5 million for transfer of additional
portion of land and building at the R&D
centre. As Orchid is admitted to the
corporate debt restructuring (CDR) process,
the consummation of the BTA has been
added as a part of the CDR process. The
final CDR package is under preparation.
Orchid sold off its injectable business
to Hospira in the fiscal ended March 2010
(FY 2010). At that time, the firm had entered
into a 10-year exclusive agreement to supply
API for the generic injectable
pharmaceuticals business sold to Hospira.
With debt of Rs 3414 crore and debt-toequity ratio of 3.58, Orchid reported
consolidated loss of Rs 558 crore in the 18
months ended 30 September 2013 as against
profit of Rs 97.5 crore in FY 2012.
The deal with Hospira is crucial for
Orchid to right-size its balance sheet.
However, this agreement does not mean the
company will be out of the woods
immediately. There are far too many issues
to be tackled.
The statutory auditors have issued
qualified opinion on three counts in their
report. First, Orchid has outstanding
advances of Rs 524.6 crore to various parties.
It has not received any materials or capital
goods against these advances. As per the
explanation, the company has not been able
to take delivery of materials due to financial
constraints. The auditors have expressed
their inability to express a view on the
recoverability of this advance.
Second, Orchid has investments of Rs
94.8 crore and loans of Rs 34.2 crore in Bexel
Pharmaceuticals Inc, its wholly owned
subsidiary. Lately, Bexel has not been
spending any money on research on the
molecule as no financial support is coming
from Orchid. Further, Orchid has not
allocated any funds for future development.
As per the auditors, it is necessary to impair
the value of the investment as no information
is available with the company on the value
that can be recovered from the sale of rights
over the molecule possessed by Bexel. Orchid
is confident that value of molecules held by
Bexel will be more than the investment. Bexel
reported loss of Rs 1 crore in the 18 months
ended 30 September 2013.
Third, Orchid has gone for debt
restructuring process. Therefore, it has not

29

StockAlert
received confirmation of balance relating to
loans and other funded and non-funded dues
from banks. The books have been closed on
the basis of the information provided by
various banks to the CDR-empowered
group. Moreover, interest has been
accounted for to the extent debited by banks
or information provided by banks. No
provisions have been made for of dues to
banks where such debit or information have
not been made or provided by banks.
Additionally, the auditors have put two
issues as emphasis of matter. Orchid has
paid remuneration of Rs 7.3 crore to the
managing director and a wholetime director.
This excess of minimum remuneration
prescribed under the Schedule XIII of the
Companies Act, 1956. This is subject to the
approval of the Central government. The
government approval for excess
remuneration for FY 2012 is still awaited.
Second, IDBI Bank has given notice to
Orchid to convert term loan of Rs 30.1 crore
into equity shares at par as per the loan
agreement. The conversion has been
disputed by the company. The matter is with
the High Court of Madras. This development
needs to be closely monitored. This is
because of several reasons like debt
restructuring, financial woes, and promoters
relatively lower stake. A significant portion
of this is pledged with lenders.
Promoters Raghavendra Rao and others
held 32.28% equity stake at end December
2013. Of this three-fourth is pledged. A year

Rs 154.2-cr unamortised foreign exchange loss

ago, the promoters had pledged 78% of their


equity stake. Further, reflecting on the
internal control systems, the auditors in the
annexure to the main audit report had noted
that large purchase of capital goods have
been made through a single source. Thus the
internal audit system has to be strengthened
considering the size and nature of Orchids
business. The coverage carried out by the
independent chartered accountant firm
approved by the company needs to be
enlarged to make it commensurate with the
size, reads the annexure.
As per the auditors, there has been
continuous delay in payment of undisputed
statutory dues. Dividend distribution tax of
Rs 3.8 crore outstanding on 30 September
2013 was for over six months from the date

In red
Orchid Chemicals and Pharmaceuticals slipped into cash losses in the 18 months ended 30
September 2013 as against cash profit in FY 2012
YEAR END
Equity (Rs cr)
Net Worth (Rs cr)
Total debt
Sales (Rs cr)
Other Income (Rs cr)
RPAT (after Minority Interest) (Rs cr)
APAT (Rs cr)
Cash profit (Rs cr)
Book Value (Rs)
Payout (%)
Debt-Equity ratio (times)
Interest Cover
PBIDTM (%)
APATM (%)
ROCE (%)
RONW (%)

201309*

FY 2012

FY 2011

FY 2010

FY 2009

70.45
379.98
3414.07
1947.70
147.99
-558.03
-609.27
-306.11
53.94
0.04
3.58
-0.10
10.31
-28.58
0.00
0.00

70.44
1132.30
2005.23
1873.60
136.19
97.48
101.27
251.22
160.74
17.63
1.85
1.42
21.66
5.16
8.03
8.83

70.44
1069.24
2079.45
1781.79
77.29
156.19
155.62
289.69
151.79
16.82
1.85
2.47
23.44
8.68
9.96
15.53

70.44
937.66
1643.65
1343.45
1023.90
339.25
-543.72
494.15
133.11
27.36
2.71
-1.24
-10.84
-40.21
-10.34
-69.17

70.44
633.80
2615.85
1296.85
86.05
-48.99
-47.72
85.00
89.98
-18.12
3.53
0.78
19.61
-3.74
0.00
0.00

RPAT: Reported profit after tax. APAT: Adjusted profit after tax. Year end March. * Eighteen months ended September 2013.
Source: Capitaline Databases

30

it became payable. The liquidity crunch


faced by the company is obvious. In fact, it
slipped into cash losses in the 18 months
ended 30 September 2013 as against cash
profit in FY 2012. Orchid has defaulted in
repayment of dues to all the financial
institutions and banks during this period.
Also, funds aggregating to Rs 652.2 crore
raised on short-term basis have been used
for long-term purposes.
Apart from the issues highlighted in the
audit report on standalone accounts, the
auditors have qualified the consolidated
financial statements on account of inclusion
of the unaudited financial statements of
subsidiaries, associate and joint venture,
which were provided by Orchid. The
financial statements of these entities reflect
negative liabilities of Rs 79.1 crore and total
revenue of Rs 72.7 crore for the 18 months
ended 30 September 2013.
The exposure to foreign exchange market
is another trouble spot for Orchid. However,
the amended Accounting Standard (AS)-11
on the effects of changes in the foreign
exchange rates, which has been adopted, has
helped the company to report better
numbers. As per the amended AS-11, foreign
exchange gain or losses arising on reporting
of foreign currency monetary items can be
amortised over the balance period of longterm assets and liabilities. The unamortised
foreign exchange loss stood a hefty Rs 154.2
crore on 31 December 2013. Additionally,
the company reported foreign exchange loss
of Rs 10.4 crore in the quarter ended 31
December 2013. This is not under the
purview of the amended AS-11 and pertains
to amortisation of exchange loss on
restatement of foreign currency loans.
Outlook
Though Orchids deal with Hospira is
delayed, the good part is it is on the track.
According to information shared by Hospira
in its investors presentation mid February
2014, the acquisition is expected to close by
mid 2014.
But for the stock to bounce back on the
trading floor, Orchid requires putting in hard
work to restore investors confidence as the
company is among the top wealth
destructors. The stock has lost 86% from
its five-year high of Rs 344.4 in October
2010. Financial troubles are part and parcel
of any business. But concerns raised by the
auditors are a big letdown.
S Khedekar
Mar 17 - 30, 2014 CAPITAL MARKET

Vous aimerez peut-être aussi