Promoter Pledging : Companies on a sticky wicket

The recent case of GTL group companies which suffered heavily on Monday has originated few new issues on the bourses. The concerns revolve around debt repayment, pledged shares and fund raising.

Shares of telecom infrastructure company GTL plummeted Monday due to concerns over debt repayment, pledged shares and fund raising and even the promoters were caught unaware of the difficult situation. The chairman's repeated assurances it had not defaulted and that its business fundamentals remain strong did not help the cause.

GTL shares declined as much as 62.3%, the sharpest in 54 months, to Rs 127.50, and GTL Infrastructure as much as 48.5% to its all-time low of Rs 15.25 in a an already suffering market.

Suddenly, the promoter pledging keyword is causing a big drag on shares. If we go by the trend, the shares of the companies in which promoters have pledged significant part of their holdings, they have corrected more than the broader market.

RBI continues it’s rate hike spree to douse inflation. The recent rate hike on last Thursday was tenth since March 2010.Though the stubborn inflation has not shown any signs of easing, but these rate hikes may lead to new fears for the promoters who have pledged their shares.

The fears are that promoters would be unable to meet the corresponding increase in interest costs resulting in sales by non-banking finance companies (NBFC), which lend to promoters against their shares. A lot of the promoter funding is done by NBFCs which have an appetite for high risk funding at high interest rates. Their own cost of funding has gone up after the rate hikes and promoters’ ability to pay back borrowed money is under question, resulting in a sell-off in many cases.

A lot of NBFCs had been caught on the wrong foot in December 2010, when there was a sharp correction in midcap stocks but this time NBFCs are more alert to the possibility of sudden and deep downward price movements.

Stocks with a high proportion of pledged promoter shares are particularly vulnerable in a bear market. The following is the list of companies on the basis of percentage of promoter holdings pledged with lenders and also the company is operational in the F&O segment.

Out of the 20 scrips mentioned above, 6 are from real estate industry .Companies in the infrastructure and realty sectors are among the worst affected with promoters said to be cutting costs by decreasing spends on advertising and marketing. S Kumars, Orchid and Unitech which are constituents of this list have also faced selling pressure in the last couple of days, though not as vigorously as the GTL duo which continues to suffer.

The stocks operational in the F&O segment suffer a bigger hit in comparison to their non F&O compatriots. The bears start shorting the stock futures first and once the futures become weak, the effect passes on to the stock price as well. The usual differential between the stock price and futures is not more than 1% so any fall in futures leads to a proportional fall in stock price

The falling stock price makes the task tough for promoters as any fall below a certain price level induces a situation of promotes receiving margin calls from lenders. The promoters either has do a part payment of the loan or deposit more shares with the lender, as collateral. If the promoters fail to do either of the two, lenders will dump the shares to recover their money and fulfills the bear’s wishes as they square-off their positions by managing a net profit.

Investor generally rushes in for a buying spree, allured by the falling stock prices and in the process loses money or remains invested in the stock facing a huge loss.

Though the kind of 15-20% intra-day fall in all such companies is not fundamentally justifiable, but one needs to be cautious investing in companies with high proportion of pledged shares.

References:

1) http://www.finalaya.com/
2) http://www.bseindia.com/
3) http://economictimes.indiatimes.com/
4) http://www.dnaindia.com/
5) http://www.business-standard.com/

VA Tech Wabag : A Promising Mid-Cap Bet

History:

The company was incorporated as a public limited company called Balcke Durr Cooling Towers Limited on February 17, 1995 at Chennai. The name of Company was changed to Balcke Durr and Wabag Technologies Limited on September 12, 1996 by a special resolution of the members dated July 29, 1996. The name of this company was further changed to VA Tech Wabag Limited on April 4, 2000 by a special resolution of the members dated March 10, 2000.

 

Industry: Engineering.

Business:

VA Tech Wabag Ltd. designs and builds water and sewage treatment plants. The Company constructs sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse plants. VA Tech Wabag serves municipalities and customers in the power, steel, and oil and gas industries.

Shareholding Pattern:

As on 31 March 2011, the promoters hold 31.02% of VA Tech while public shareholding (excluding Institutional investments) was 24.87%.The institutions hold 44.11% of VA Tech.

In Institutions category, Mutual Funds/UTI hold 17.03%, FI/Banks hold 0.16%, FII hold 24.47% and Foreign Venture Capital investors hold 2.47% in VA Tech.

Analyzing the trend of last 3 SHP’s posted, FII holdings has risen from 12.34% (as on 11-Oct-10) to 24.47% (as on 31-Mar-11). DII holdings has dipped marginally from 22.15% to 19.64%.In others, it has changed from 34.29% to 24.87%.Going with the trend, FIIs continue to like this stock and DIIs have also not distanced themselves much from this stock.

Corporate Actions:

The company has recently announced a dividend of Rs.10 (200%) on it’s Face Value of Rs. 5. in the board meeting dated 26-May-2011. Also, the company BOD’s have approved sub-division of shares from Rs. 5 to Rs. 2 in the same board meeting.

Analyzing VA Tech Wabag:

The company, which has reported a 35 per cent growth in net profit for 2010-11 over the previous year, sees rising costs as a challenge that can be addressed through improved efficiencies, growth in new markets, and focus on O&M contracts which offer twice as much margin as EPC contracts.

For the fourth quarter ended March 31, 2011, VA Tech Wabag has reported a 11 per cent growth in net profit over the corresponding quarter previously. Its net profit was Rs 39.1 crore (Rs 35.3 crore) on revenue of Rs 356.3 crore (Rs 340.8 crore).

For 2010-11 it reported a net profit of Rs 55.3 crore (Rs 41 crore) on an income of Rs 733.5 crore (Rs 705.5 crore).

 

VA Tech Wabag's March '11 quarter profit came on the back of exceptional one-time expenses and weakness in Euro, it wasn't much of a surprise. Although trading below its IPO price, the scrip did not witness any sudden jolt following the announcement.

The company which has operations in 19 countries has bagged over Rs 1,802 crore firm orders taking its order backlog to Rs 3,402 crore.With a strong order book and a war chest for possible acquisitions, the company is well placed to capitalise on growth prospects.

Price Movements & Returns:

VA Tech had a dream debut on the bourses, listing at 1655 and touching a high of 1806 on it’s listing day(13-Oct-10) against the issue price of 1310. The company’s issued shares in a price range of 1230-1310 in it’s IPO which lasted from 22-Sep-10 to 27-Sep-10 IPO. The company’s IPO which received a ICRA grading 4 got an enthusiastic response from investors and closed with a subscription of 35.11 times.

Since then, things have not been so rosy for VA Tech, currently quotes tad below the issue price at 1287.30 (close price of 09-Jun-11).The share price slipped below the lower band of the issue price in March and made a 52 week low at 1131 on BSE and 1000 on NSE respectively.

The company has been a low volume stock. The sub-division initiative by the BOD is being looked as an effort to enthuse some kind of investor interest at low market prices (post sub-division) of shares. Although, any such efforts usually don’t fructify, it may just lead to some short term investor interest.

If we compare it’s performance for a period starting from 13-Oct-10 (listing day) till 07-06-2011, it has posted -29.16% returns. Analysing the performance of BSE-IPO and BSE-MIDCAP (where it acts as a constituent) in the same period, they have posted returns of -22.84% and -24.08% respectively.

Let's focus on the positives, yet again. Firstly, it is an internationally acclaimed player operating in a niche segment of water-treatment technology which has huge demand in the foreseeable future. Secondly, the company has strong cash reserves, which can prove handy for any inorganic growth opportunities. Thirdly, it’s available at a discount from it’s IPO issue price and way below it’s all-time high.

  

References:

1) http://www.finalaya.com/
2) http://www.bseindia.com/
3) http://www.thehindubusinessline.com/
4) http://www.wabag.com/
5) http://economictimes.indiatimes.com/

VST Industries : Consistent Dividend Payer

History: The Vazir Sultan Tobacco Company Limited was incorporated on 10th November,1930 under the Hyderabad Companies Act No. IV of 1320 Fasli and now governed under the Companies Act, 1956. The name of the Company was subsequently changed to VST Industries Limited on 30th April, 1983.

Business: VST Industries is engaged production of cigarettes and tobacco. It ranks third in the Indian tobacco industry and competes with the likes of ITC and Godfrey Phillips. The Company's cigarette brands include "Charminar Specials, "Shah-I-Deccan", "Charms Virginia Filter Kings," "Vazir", "Qila" and "Ambassador." VST Industries sells its products in India and abroad.

Shareholding Pattern: As on 31 March 2011, the promoters hold 32.16% of VST while public shareholding (excluding Institutional investments) was 55.37%.Out of 55.37%, bodies corporate hold 38.27% of VST.

Institutions hold 12.47% of VST. Mutual Funds/UTI, FI/Banks, Insurance Companies and FII hold 5.62%, 0.10%, 6.17% and 0.57% respectively in this category.

VST has a fantastic track record of consistent high dividend. Not only the dividend is consistent but the dividend payout (%) is also increasing year after year. Very few companies have replicated it’s superior long-term track record.

The company has unfailingly paid handsome dividends but these tempting dividends do not outweigh business concerns, if any. Just because a company pays hefty dividends it does not guarantee it will continue to do so.One should analyze whether the growth of dividends is in accordance with the company's financial growth.

Analyzing VST:    

  

On a Y-o-Y comparison,the sales have surged 23% from 4750.10 million to 5845.70 million.The net profit has also jumped 53% on a yearly basis.The company quotes at a EPS of 61.53 as on FY end 10-11 vis-a-vis 40.18 as on FY end 09-10.

Furthermore,  on exploring the performance from FY06 to FY10,company has consistently posted decent numbers on an annualized basis.

Since FY06, the net sales have grown ~11% CAGR till 2010 on back of increasing volumes while net profits have grown by ~10% during the same period.

VST has maintained a ROE greater than 23% since last 5 years though the margins have played a dampener primarily due to excise hikes and cost of tobacco leaves (key raw material). But it didn’t pass along the price hikes on the customer for maintaining the market share.

If we take into account the YTD returns till 27 May,2011, the company has outperformed it's industy peers by a huge gap.VST has posted 43.33% return in comparion to ITC's8.62%, Godfrey Phillip's -7.61% and Golden Tobbaco's -20.76% in the similar time frame.The company has posted mammoth returns in a short span,considering the performance of key benchmarks for the same tenure.

 

Recapitulating the positives, the stock has been a consistent performer if we go by the company financials. It enjoys a brand-loyalty and the promoters also have vast experience and expertise in this industry.

References:  
1) http://www.finalaya.com
2) http://www.bseindia.com
3) www.vsthyd.com
4) http://economictimes.indiatimes.com/