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  • Sticking to an indebted company's stock isn't easy

    Quote by Parag Parikh in Business Statndard, April 2, 2015

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    While the terms of restructuring might aid the company, there is always the risk that the firm won't come out of the mess

    Sticking to an indebted company's stock isn't easy

    It is a tough call for investors in a company that is getting into corporate debt restructuring. On the one hand, there is a sense of relief because the company will get more time and, most likely, better terms to repay its debt. On the other, there is always a sense of fear that if the company closes, like Kingfisher Airlines, there is everything to lose.

    However, if one looks at the recent past, the first reaction of investors is relief. For example, when Pipavav Defence and Offshore Engineering announced that its had approved a debt restructuring package, the stock price started rising. The news came after market hours on March 31. The next day, the share price went up 5.59 per cent to Rs 60.45 during the intra-day trade. Similarly, positive movement in stock prices was seen in the case of Hanung Toys & Textiles, Shriram EPC and Gammon India.

    “Such an approval means the company has got a breathing space. A consortium of lenders accepts such proposals only after assessing if it is inherently viable and is stuck because of financial burden,” says Ajay Bodke, head (investment strategy & advisory) at Prabhudas Lilladher. To expedite the debt restructuring, the Reserve Bank of India has made way for a Joint Lenders’ Forum that has come into effect from April 1.

    “Though the perception is that such companies are badly managed, and in some cases it is true, there are firms which have a good business potential but could not repay debt as external factors affected their margins,” said Nirmal Gangwal of Brescon Corporate Advisors, who has helped many Indian companies restructure debt.

    Bodke gives the example of infrastructure companies that were witnessing unprecedented growth as the economy was doing well. However, the projects they undertook got affected as the economy’s growth ground to a halt, policy paralysis, administrative logjam, and elevated levels of inflation led to high interest rates. “In such cases, the companies cannot be entirely blamed. As the country still badly needs infrastructure assets - be it roads, power, rails, ports, airports – some of these companies can see a turnaround,” said Bodke.

    As of December 2014, the CDR Cell had approved 520 cases (since FY2008-09) that sought a total debt restructuring of Rs 3.8 lakh crore. Of these, only 77 cases exited successfully whereas 155 were withdrawn as the package failed. A large number, 288, is still live and the aggregate debt in these cases amounts to Rs 2.72 lakh crore. The number shows although banks do a deep study in evaluating the cases, there’s always uncertainty about the outcome.

    Obviously, existing investors need to have faith in the management to hold on. If the turnaround happens, the benefits that will accrue to a shareholder by being a patient investor will be far higher. “Another parameter to evaluate the stock is looking at the amount of debt. If the debt to equity ratio is far higher than peers, it’s better to stay away,” said Daljeet Kohli, head of research at IndiaNivesh Securities.

    Veteran investor Parag Parikh also wants investors to look at other parameters such as whether the company has taken loans for business expansion or to buy swanky offices and whether the salaries of top management has gone up despite the troubles.

    The original article could be seen here.

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