Sunday, August 24, 2008

Piramal Glass – Till debt does us apart

I was running through the Piramal Glass balance sheet and here are some observations. The company has operations in India, Srilanka and a plant in the US. The US operations are bleeding and clearly some of the acquisitions have been pretty expensive.

The company has a networth of Rs 155 crores against which it has a debt of Rs 1041 crores. Debt – Equity ratio of 6.7:1. Now that is a hell lot of debt on the books.

The company made a loss of 22 crores last year on a turnover of 817 crores. Marginally improved over last year where it made a loss of 37 crores. Operations generated a cash flow of 17 crores against which they paid a interest of 64 crores. So effectively they had to borrow money just to pay interest. They added about 336 crores of debt on the balance sheet.

Power & fuel constitute a significant chunk of the cost, almost 17% of sales. This will go up further this year hitting bottomline. About 510 crores worth of loans are repayable this year which effectively means that they would get funded at a higher cost increasing interest expenses.

On running through the balance sheet, the thought which came to my mind was that these guys are in some serious trouble. I then went to the BSE site and looked at the Q1 results.

It just keeps getting worse. Q1 loss of 11.4 crores as opposed to a FY 08 loss of 22 crores. Q1 interest cost has ballooned to 25 crores against a full year interest of 64 crores last year. Power & Fuel costs have gone up to 21% of sales.

This is a classic case of misplaced overleveraged acquisitions which can bleed a company dry.

But the best part is still to come, the company paid a dividend of 15% to the shareholders because the standalone results don’t reflect the loss. Paid out of borrowed money of course.

The stock is currently ruling at around the 145-150 levels against a book value of Rs 90 which is shrinking every year. The stock price has come down from the Rs 400 mark where it was hovering around six month back.

It would be interesting to watch how they dig themselves out of this hole.


Rohit Chauhan said...

a good shorting candidate ? is there a systematic way to short stocks in india ?


Anonymous said...

Hello Ninad

@ Rohit : Could it also be a good pick once the company changes the capital structure? The stock will be beaten down due to the amount of debt. Once the company starts clearing the debt, the earnings will improve. This can lead to an increase in the stock price!

Ninad Kunder said...


One can short a stock in the futures & options market provided it is traded under that segment. Piramal Glass isn't.

SEBI introduced Stock lending & borrowing scheme(SLBS)though it is at a inception stage with very thin volumes and largely in the instituional domain.

For a effective stock lending mechanism to initiate "value shorts" one needs to have long terms stock lenders like index funds, pension fund etc to provide liquidity.



Ninad Kunder said...

Hi Anon

Though changing the capital structure is a key solution, its going to be tough in the current market conditions. Tata Motors, Hindalco are finding it tough to raise capital through the rights route without too much equity dilution.

There has to be a operational turnaround so that business starts atleast generating cash to service its debt. Financial restructuring will take sometime unless the promotor group infuses some capital into the company.