PLEDGING OF SHARES: A FITNESS INDICATOR
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Just a couple of years ago when the economy was struggling for recovery, the stock markets were volatile. The interest rates were at an elevated level and hence many a company’s promoters pledged an excessive portion of their shares to raise debt to fund their firm’s growth or for the purpose of acquisition or to manage the working capital requirements of the company, particularly in a tight liquidity situation. Now the Indian economy is showing signs of early revival; however, many promoters’ shares continue to be pledged in a large proportion from almost two years or more.
The pledging of shares by promoters could pose a factor of concern in both falling as well as in rising market scenarios, when large-scale pledging of promoter equity could create issues for retail investors’ wealth. The amount of risk that companies run by pledging shares is different for small and mid-cap companies than it is for large-caps. The betas are far higher in the case of small companies because if the market corrects, the stocks of such companies plummet, resulting in financial institutions selling these shares and putting further pressure on the stocks.
Currently the Indian market is enjoying a bull rally that took off from early February 2014 when the Sensex was at 20,334. In this scenario, stocks which are fundamentally good as well as those which are weak move upwards. Once market gets into the correction mode, higher the pledging the companies have higher is the risk of volatility in its share price. This is because as the share prices fall, the overall value of the pledged collateral falls. This would put pressure on the promoters to produce more assets as collateral. Sometimes the lender may also be forced to sell some of the shares to ensure that the loan does not turn into a bad one. If the promoter is unable to meet the obligations of borrowing, the ownership of shares is transferred to the lender, who may then sell it to recover the loan.
In the following paragraphs we have covered different scenarios where the promoters’ shares are pledged and how one should approach such companies. We have provided both technical as well as fundamental views on these stocks.
Nitco | BSE Code: 532630 | Face Value Rs 10 | Book Value Rs -10.11 | CMP: Rs 72.35
Fundamental: Nitco is a manufacturer of tiles (floor and wall), marble, mosaic and metal craft. The company is also engaged in real estate development. For FY15 the company registered net loss of Rs 119.33 crore as against Rs 211.06 crore loss in the previous financial year. Its net sales grew by 7.6 per cent at Rs 837.42 crore compared with net sales of Rs 778.56 crore in FY14. Even in Q1 FY16 the company reported net loss of Rs 17.76 crore as against net loss of Rs 56.90 crore during the previous quarter ended June 2014. Sales declined 8.40 per cent to Rs 180.42 crore as against Rs 196.97 crore during the corresponding previous year quarter.Nitco has debt of Rs 886.89 crore on its book as on March 31, 2105 and its net worth also turned negative last year due to the company making loss from the last four years. As on June 30, 2015, the promoters held 69.54 per cent stake, out of which 84.12 per cent shares are pledged. The stock price jumped by 53 per cent and 106 per cent from the last one and two years respectively. Considering these factors, we recommend exiting from this stock or avoiding it.
Technical: The stock had seen a decent upward movement in the last couple of years. On the weekly time frame chart the stock had formed a good base around levels of Rs 11-12 as on October 18, 2013. Since then it has moved in a northward direction and registered a high of Rs 34.80. Currently the stock has formed a potentially long-legged Doji candlestick pattern; this pattern is a bearish reversal candlestick pattern. The stock has strong resistance in the zone of Rs 33-34 as indicated by the Fibonacci retracement level of 127.2 per cent and last time the stock corrected about 50 per cent from this resistance zone. Therefore, we feel any upside for the stock would be capped from its current levels.
Gayatri Projects | BSE Code: 532767 | Face Value Rs 10 | Book Value Rs 122.90 | CMP: Rs 410
Fundamental: Gayatri Projects is a well-diversified infrastructure company which executes civil works, including roads, canals, airport runways, ports/harbours, dams and reservoirs, railways, among others. In FY15 the company reported subdued revenues of Rs 1,601 crore as against Rs 1,813 crore in FY14. The EBITDA of the company declined to Rs 208 crore as against Rs 270 crore in the previous year due to EBITDA margin declining by 190 bps to 12.99 per cent. The bottomline of the company declined by 54 per cent to Rs 22 crore as against Rs 48 crore during FY14 on account of a slower pace of project execution. Its order book at the end of March 2015 stood at Rs 5,968 crore of which about 54 per cent is irrigation projects, 20 per cent BOT projects, 17 per cent industrial work, and the balance being roads.
In the last three months the stock price jumped 2.7 times purely based on management guidelines. However, at its CMP the stock price looks expensive and as on March 31, 2105 its debt equity ratio stands at 2.5 times at a standalone level and 8.76 times at a consolidated level. As on June 30, 2015, the promoters held 50.32 per cent stake, out of which 99.99 per cent shares are pledged. Therefore we recommended exiting from this stock or avoiding it.
Technical: This stock has been a good investment bet as it has rallied smartly in the last 8-9 months. On the daily chart the stock formed a good base around levels of Rs 133-136 and consolidated in a range Rs 133-176 for about five months and as soon as the stock breached its resistance on the upper side it formed a sequence of higher top and higher bottom. Currently the stock has not been able to breach its resistance zone of Rs 428-430 and on Friday, July 31, 2015 the stock has formed a Hanging Man candlestick pattern which is a warning of a potential reversal downward. Considering this, the stock is likely to witness lacklustre movement.
Punjab Chemicals (PCCP) | BSE Code: 506618| Face Value Rs 10 | Book Value Rs 28.30 | CMP: Rs 294.00
Fundamental: Punjab Chemicals & Crop Protection (PCCP) is engaged in the agrochemicals’ business. The company reported an over three-fold jump in net profit at Rs 3.56 crore in FY15 at a standalone level and at a consolidated level reported Rs 14.2 crore as against Rs 0.96 crore in the previous year. The topline grew by 9.8 per cent to Rs 565 crore as against Rs 514.4 crore in the previous year. Going forward, the company is expecting a quantum jump in net profit of Rs 20 crore in the next financial year i.e. 2015-16 and also targets to reduce its debt which will help decrease operating costs.
The company also entered into a strategic long-term sales’ contract for a few agrochemicals with the buying of Agrichem. However, PCCP has a debt of Rs 246.6 crore on its books as on March 31, 2105 and its net worth has also been in negative from the last four years due to the company making loss during FY09-13. At its CMP, the stock is trading at a P/E multiple of 25.7x of FY15. The stock price jumped by three times and seven times from the last one year and two years respectively. In the latest quarter the promoters reduced their stake to 44.80 per cent as against 46.03 per cent in the preceding quarter. Also, 77.28 per cent shares are pledged. Considering the above factors, it looks very expensive even with its financial turnaround. Therefore we recommended exiting from this stock or avoiding it.
Technical: The stock’s price has soared over the last one year and it saw a good breakout of the downward sloping trendline on the monthly chart as on March 26, 2015 along with a rise in the volume. Since then the stock has formed a sequence of higher top-higher bottom to touch a high of Rs 304.4. Currently, on the monthly time frame, the stock is trading near its multiple resistance zone of Rs 295-310 and has, in the past, seen a strong reversal from this resistance zone. If in the coming months the stock is not able to breach this resistance zone of Rs 295-310, expect history to repeat itself and the stock will see a good correction from its current levels.
Sical Logistics | BSE Code: 520086| Face Value Rs 10 | Book Value Rs 79.60 | CMP: Rs 192.00
Fundamental: Sical Logistics is co-promoted by Coffee Day Group and AC Muthiah with the former owning a majority stake in the public listed firm. It operates mechanised port terminals (container and bulk), container freight stations, container rakes, and rail and road terminals. It also provides offshore support services to the oil and gas industry. It primarily provides integrated multimodal logistics’ services and its main activities include stevedoring, port handling, shipping agency, trucking and terminal management. In FY15, the company’s topline marginally declined to Rs 827.52 crore at a consolidated level as against Rs 841.97 crore in FY14.
However, the bottomline jumped by 72 per cent to Rs 16.32 crore as against Rs 9.47 crore in the previous year due to financial cost decline by 23.6 per cent to Rs 57.11 crore. As on March 31, 2015 the company’s debt to equity stands at 1.36. Currently the promoter holds 69.31 per cent, of which 52.20 per cent shares are pledged. A positive factor is that we can rely on the management of this company. Currently the logistics industry has a good opportunity in India; however, such a level of growth has not been witnessed with this company. Considering the factors, we recommend exiting from the stock.
Technical: This logistics stock has emerged as one of the best performers in the last couple of years. On the weekly time frame the stock formed a good base around the levels of Rs 49 and from there on the stock has moved from strength to strength to register a high of Rs 202.15 in the month of January. Currently, the stock has formed a perfect Doji candlestick pattern on the weekly chart along with high volumes and this candlestick pattern indicates that there is indecision and uncertainty. As we have seen pick up in volume activity, it could be a sign of distribution at a higher level with the formation of the Doji pattern. Considering this set-up, it’s likely to take a breather and move sideways.
Neo Corp International | BSE Code: 523820 |Face Value Rs 10 | Book Value Rs 85| CMP: Rs 38.00
Fundamental: Neo Corp International (NCIL) is engaged in manufacturing technical textiles. The company’s products and services include Packtech, Agrotech, Geotech, Buildtech, Hometech and end-user solutions. For the full year FY15, its net profit rose 50 per cent to Rs 45 crore as against Rs 30 crore during the previous year. Sales rose 37.9 per cent to Rs 1357 crore in FY15 as against Rs 984 crore in FY14. Over the last five years, the company has shown tremendous revenue growth with a CAGR of 46 per cent and net profit of 35 per cent. However, the company has low bargaining power with their customers and suppliers because of downtrend in EBITDA margin at 10.2 per cent in FY15 as against 12.93 per cent in FY12. As on March 31, 2105, its debt stands at Rs 422 crore, consequently translating the debt to equity ratio at 1.29. During the same period the promoters’ holding was 61.29 per cent as against 75.10 per cent on March 31, 2014, which is positive sign. At its CMP the stock price to earnings (P/E) stand at 2.8x with P/BV multiple of 0.38x of FY15 which is at a comfortable valuation. Considering the factors, we recommend holding this stock.
Technical: This stock has been a perfect example of rags to riches as it has delivered multi-fold returns in a couple of years. The stock was hovering in the zone of Rs 7-8 in the year 2013 and from there on it had rallied up to levels of Rs 45.90 in quick time. On the weekly chart the stock made a perfect Doji candlestick pattern around the levels of Rs 45.90 and since then it’s making a sequence of lower top-lower bottom pattern. Currently, the stock has formed a multiple Doji candlestick pattern on the weekly chart and has not able to cross its resistance zone of Rs 35 as indicated by a downward sloping trend line which has been formed by joining its high of Rs 45.90. Considering this we are expecting prices to correct going forward.