Rupa & Co.-another Lingerie Company-Is it truly widely held

One more undergarment company, Rupa & Co.  got itself listed recently at the Bombay Stock Exchange. This was a company that had done an IPO long ago and was listed at Calcutta and Jaipur Stock Exchanges ( management is Marwari hence the choice of exchanges ). With almost all regional exchanges dead and not trading, the stock had been dormant for quite a few years.

Enthused by the huge valuations that Mr Market has granted to Page Industries ( Jockey licensee) and Lovable ( a split from VIP ), Rupa & Co. also decided to launch itself on the pockets of the investors and chose BSE as the exchange since here is an exchange that is desperate for business and is willing to be more tolerant of corporate governance issues.

Interestingly Microsec, a Calcutta based investment house ( it would like to itself as an investment bank but I will not grant it that title) came out with a report on the eve of its listing at BSE. Now if that is not a managed operation then what is. Nevertheless, dubious that it may be, it is not illegal. I have engaged reputed investment houses, both multinational and Indian, in the past, to write reports in companies where we needed to place equity and they generally did a thorough job ( Its like a credit rating company that charges you to do a rating on you and again they do a good job normally).

I was intrigued by the huge volumes that were generated on the first day of trading and decided to run through the annual report of 2010-11 and the shareholding pattern and this is what emerged.

Distribution of Shareholding as of 31-3-2011

No. Of shares Shareholders Shares
1-500 532 81.84% 54,645 0.69%
501-1000 50 7.7% 43,884 0.55%
1001-2000 12 1.85% 17,682 0.22%
2001-3000 7 1.08% 17,600 0.22%
3001-4000 4 0.61% 15,500 0.2%
4001-5000 1 0.15% 4091 0.05%
5001-10,000 5 0.77% 36,720 0.46%
10,001-above 39 6% 77,62,334 97.61%
Total 650 79,52.456 100%

Just before listing, the company decided to split the stock in the ration of 5 for 1 so we will just multiply the shareholding by 5 t which only change the 4th column

No. Of shares Shareholders Shares
1-500 532 81.84% 273,225 0.69%
501-1000 50 7.7% 219,420 0.55%
1001-2000 12 1.85% 88,410 0.22%
2001-3000 7 1.08% 88,000 0.22%
3001-4000 4 0.61% 77,500 0.2%
4001-5000 1 0.15% 20,455 0.05%
5001-10,000 5 0.77% 1,83,600 0.46%
10,001-above 39 6% 3,88,11,670 97.61%
Total 650 3,97,62,280 100%

Now look at the shareholding pattern as of 30th June 2011

Category of Shareholders No. Of Entities Shares held Demat % holding
Promoters
Individual 38 3,62,65,510 3,62,65,510 45.6%
Corporate 3 2,33,20,880 2,33,20,880 29.33%
Total 41 5,95,86,390 5,95,86,390 74.93%
Public
Bodies Corp 16 1,83,78,900 1,83,43,900 23.11%
Individual Shareholders
Up to 1 lac 612 13,75,100 6,36,530 1.73%
Above 1 lac 1 1,84,170 0.23%
Total 629 1,99,38,170 1,89,80,430 25.07%
Grand Total 670 7,97,24,560 7,85,66,820  

If we consider the public shareholding,  we will notice that individuals hold only 1.96% whereas the bulk (23.11%) is concentrated in the hands of  16 corporates of which 5 corporates hold 1,79,26000  ( 22.54%) and 11 Corporate bodies hold only 4,52,900 shares.

Further of the 612 individuals holding 13,75,100 shares, 532 shareholders hold only 2,73,225 shares  ( if you multiply 532 by 500 you will get 2,66,000 but we will let it go ). Interestingly  of these  less than 50% were held in demat form as of 30th June 2011.

All this means that there were only 7.38 lac shares available for trade for public.

Of course the BC could trade and nothing can stop them from buying and selling and there is no bar, it is perfectly legal. But that would be a travesty of the whole idea of listing being for the purpose of wide holding of the stocks.

I am sure promoters would not trade their shares on the first day of listing itself

There are 613 individuals. My take is that these are or were people who were employees and/or relatives of employees who were made to subscribe to 500 shares each at the time of IPO and lsiting at Jaipur and Calcutta stock exchanges. Reason for less demat is clear. Most of these people are not traceable. They would have left the employ of the company or may simply not be the kind of people to hold demat accounts on their own. Usually physical shares can be held benami by holding the share certificate and the transfer deed with the signature of the original holder. This transfer deed can be revalidated by ROC for a fee of Rs 50 and lodged with the company. So if the company management is mine, there is no difficulty in transferring the shares. Problem comes in the demat part. For shares to be held in the demat account, holders need to have KYC and that gets a little tricky.

If I had the patience, I would ask the company for its register of members ( I can get it from ROC/MCA  ) if they have filed and do some research on the 16  Body Corporates who are holding 23.11% ( 18.378 million )( Average 1.14 million- do you smell the rat as yet? )  shares of the company by looking at their registered office addresses  and directors. Usually the registered office address of these companies would be related party address or residential addresses of friends and relatives.

The whole point of this note is we should not get taken in by stated fact that it is a widely held company. It is not. Which makes the share price  to be highly susceptible to manipulation.

Trading data from BSE from 9th September to 18th October reveals this. This is a T2T stock which means unless you have shares, you cannot sell and obviously on day 1 of trading only the old shareholders could trade. On day 1, 2,42,257 shares were traded. This implies that effectively  1/3rd of the shareholders sold their shares which is highly unlikely. Most likely ( and I do not have proof though if SEBI dug into it, it could establish this ) this was a managed operation and after first few days of high volume trading, it is back to 5K trade per day.

For FY 11, after the split, the EPS of the company is about Rs 4 and at current CMP of 150, it carries a PE of 37.5. Management has been shouting from rooftop that they will do a 25% growth in topline and bottom line. Even if, we were to believe it, it would it still mean an EPS of 5 for FY 12 and at current price, a PE of 30 leaving hardly any scope for appreciation in the short run.

Company is highly leveraged with Debt : Equity at more than 1 though it may have some concessional loans under TUFT( did I get this right?) wherein a company pays only 5% interest.  It is fairly clear from the pronouncements that company desperately wants to place its equity and at current Market Cap of about 1200 Cr, a 20% dilution will net it Rs 300 Cr. This alone may make for swings in stock prices so it will bear watching though T2T makes it strictly a cash upfront kind of stock.

K.S. Oil- My take

ET has an story on KS Oil which seem to imply that it is the greed of the promoters and consequent gambling in the seed futures market that has led to the present state of affairs. Here is the story if you hv not read it  KS Oil ET Aug 30, 2011.

My take is that management in its quest to keep its shareholding above 26% bought more than they could afford. Over a period of approx 4 years, they spent about 455 Crs in shoring up their stake by way of prefertial allottments, Convertible warrant subscriptions and open market buy. Of this 455 cr, approx 300 crores went to the company ( equity expansion ) and 150 cr in open market operations.

Now how did a man with humble beginning suddenly come into possession of so much of money that he could afford to spend so much money? That is the million dollar question. I believe the modus operandi was two fold. First one appears to be a classic case of over invoicing. Company with the money raised from PE funds and GDR issues and allottment to promoters and raising debt bought about 1,38,000 acres of palm plantation in Malaysia ( 50,000 Acres ) and Indonesia ( 88,000 Acres ), bought an existing oil refinery in Haldia and expanded it. It also bought and installed Wind Power plants ( classic device ). People like me who have worked with Lalas  understand how this game works.

Second was to buy shares and pledge them. Edelweiss appears to be one who kept lending money to the promoters right from 2008 onwards. It was great as long as share price held up but once the share price started to tank, perhaps management did not want to pledge any more shares and that is when Edelweiss decided to dump the pledged lot.

Siva’s entry into the company and a holding of more than 12%  besides elevation of RC Garg’s son Saurabh as VC seems to have ruffled lot of feathers and PE directors have all resigned. Rajiv Kalra of CITI in April 2011 and Jimmy Mehtani of Baring and Vivek Sett of NSR sometime thereafter ( interestingly company has not filed this with the exchanges and my query to them in this regard is still unanswered.). June quarter results are as yet not declared ( meeting to be held on 31st August for unaudited results )

A hallmark of company under Sanjay Agarwal’s leadership has been governance but this seems to have gone for a toss as company has yet to publish the audited results for year ended March 2011, send the annual report it its shareholders and hold the AGM.  Meanwhile two more independent directors have resigned in August perhaps sensing trouble.

What do I think of the future of the company? In the short run, the investment in plantations will only bear fruit from 2012 onwards. There is overcapacity in the crushing of oilseeds and also refining. Market has biggies like Adani Wilmar, Cargill, ITC, Ruchi etc. Company is still a commodities player and has not been able to build the brand which it wanted to by hiring the ex Britannia honcho Sunil Alagh.  Prices of Oil palm are now on the way down after touching a peak of 3500 Malaysian Ringgit per tonne. On top of this, private equity funds want out and their clauses of tag along/drag along may force the management to sellout. Perhaps Siva was seen as a white knight which is kind of surprising but desperate times call for desperate measures.

Company’s stock is definitely undervalued with a market cap of 450 cr and a debt of about 1500 cr. An EV of 2000 Cr for a company with these assets and a sale of more than 4000 cr  is definitely worth buying unless there are hidden skeletons in the closet a la Satyam which I very much doubt.

A risk factor which is as yet not quantified is stated policy of Indonesia in the area of Palm Plantation relocation and banning in the wet/forestland  and if this were to fructify, company may have some trouble on its hand.

Investing is a game of probabilities and risk weighing and all things considered, I would say that the scale tilts in favor of gains more than losses.  but that’s just me

Moneybloke/30.8.2011

PS: for those interested in the field, Nidhi Nath Srinivas is one of the best writers in this area. She writes for ET. A Sample  ( http://blogs.economictimes.indiatimes.com/something-fresh/entry/edible-oil-industry-is-subsidising )

PPS: This is my first entry in the blog so comments are welcome

A New Journey

I have so far been writing for myself at blogger and have been asked several times to write that other people can read as well. So this sign up at wordpress is an attempt to put my thoughts on various subjects, mostly personal finance related and decision making. This blog will also serve as a public platform to exchange views with the readers and an opportunity for me to learn. There may be some posts related to subjects that will catch my fancy from time to time.