Kwality destroyed 90 % from Rs 160 to Rs 21 in a year !~Blame the Brokers for going broke?

You were looking for 100% gains in a year…Poof ! now you see your Principal evaporating near 100% 

Kwality Limited’s Share Price has evaporated nearly 90 % from Rs 160 to Rs 21 in a year !

Blame the Brokers for going broke?  

Where was the Quality in the first place !...it was clearly basking in the sunshine of the surge in the share price of other Dairy Companies like Heritage & Parag Milk

I recollect how aghast I was when Kwality Ltd was recommended strongly by not one but several well known broking houses in 2016 & 2017 when it was being quoted in the Rs 110 to 140 range.Targets given by them were extremely tempting to succumb to ! ~ one gave Rs 263 ! ~ another projected Rs 200 !

I have often  mentioned this Company at my Fundamental Equity Value Vs Price Training Workshops when illustrating severe Corporate Governance Issues

A few months ago on March 27, 2018 Kwality had responded to the Exchanges on their concern of falling share price that there was no strategically significant development in the organisation or business & that they were committed to deliver sustainable value to its shareholders at all time…Wow!

The Problem perhaps was on news of Promoter Dhingra pledging shares…or the Company complaining to the exchanges that a broker was fradulently selling shares in the market .Earlier this month Kwality has also been put on the Additional Surveillance Measure (ASM) List.Their June 20,2018 Board Meeting to consider buyback and /or Bonus has been rescheduled to July 3,2018 as majority of the Directors could not make it

What’s going on here !

The Exchanges have just been notified of a downgrading of credit rating by Brickwork .It was just two months ago in April 2018 when Brickwork had given their last ratings  

Today Kwality  was  on lower circuit at Rs 21.15 with heavy volumes before opening up to hit upper circuit & closing a little lower at Rs 22.95 on BSE…relief rally or someone finds real value now !? …52 Week High was @ Rs 160 a year ago…that’s nearly 90% wealth destroyed  from a Market Cap of  @ Rs 3800 crs to just above Rs 500 crs !

This is not to condemn the Broking Houses or vilify them…after all the Money & Risk is all yours…no one held a Gun to your head to invest in Kwality !…so don’t blame the brokers for going broke in this ! even if they had any vested interest in recommending the Company for Investment

Just to warn you not to be carried away by momentum & sentiment in bull markets & follow anyone blindly

Oh ! if I was the Filmstar Akshay Kumar I would be concerned…he’s their brand ambassador & you can see him popping out of their FY 17 Annual Report & Ad Campaigns & Product Packaging too.Kwality’s Brand Campaign involves partnering with Mcain,Zenith Optimedia,Adfactors & Digital Quotient

Quality is always the name of the Equity Game …Clearly something is deeply amiss in Kwality for quite some time & it’s led to share price destruction on the exchanges  !…ironically it’s products quality is well established

That’s it ! Got my Theme for the next Fundamental Equity Value Vs Price Training Workshop on August 4,2018 ~ ‘Q’  attend  karey? Q is for Quality  😆

Update ,July 4,2018

Much Ado about Nothing !

Best way to describe the outcome of the rescheduled July 3,2018 Meeting yesterday to consider Buyback & Bonus & Interim Dividend

Share Price is back on lower circuit at Rs 20.65

Here’s the verbatim pretty ‘intense’ notification last evening to BSE

Dear Sir/Ma’am 

This has reference to our intimation communique dated June 07, 2018 and June 20, 2018.
In this connection, it is informed that the proposed issues relating to buyback of securities and/or Bonus issue of securities and payment of interim dividend were considered by the Board today on merits. Intense deliberations on the issues were initiated with Stakeholders both internal and external including Investors and Lenders. The matter was intensely debated in context of current situation and future vision, the Board finally concluded to defer the decision on the issues, for the time being. 

Kindly take note of the above.

Just a thought ~ It was a Board Meeting….Right? How were Investors & Lenders involved unless invited or had nominees on the Board ?…so which Investors & Lenders are they referring to as I don’t observe any nominees on board? ….next an EGM perhaps called by the agitated minority shareholders perhaps ?

Just Last year in the FY 17 AR the Chairman Dr Rattan Sagar Khanna exclaimed ” We are in a very exciting phase of growth” while the MD Sanjay Dhingra boasted ” We are in the process of becoming a best-in-class”

‘Zindagi Non-Stop’ was the positioning in a new Brand Campaign that had Akshay Kumar as the brand ambassador …it’s actually been ‘Notifications to Exchanges Non-Stop’ & ‘Share Price Destruction Non-Stop’ ….8 Notifications already by July 3,2018 in just three days of ongoing July & 17 in the last month of June 2018 !

The Red Flag often is the poor Dividend Payout…here they have declared Rs 0.10 (10%) for FY 18 but yesterday’s meeting has deferred the decision to pay it.It’s FY 18 EPS has dropped to under Rs 3 from Rs 7 in FY 17…the payout is a token 3%…in FY 17 it was under 1.5% !…one not so amusing way to view this is that the MD’s Salary in FY 17 was Rs 1.3 crs which was over 50% of a similar Rs 0.10 /share (aggregate Rs 2.36 crs) dividend payout then too.

Interestingly in FY 17 in June 2016 they had made a preferential allotment of Equity Shares at Rs 110.44 to Media Giants Bennett Coleman & Co  & HT Media Ltd.Additionally Compulsorily Convertible Warrant & Compulsorily Convertible Debenture respectively of Rs 25 crs  & Rs 14 crs were made to these entities,both of which were converted earlier this year with allotment of Equity Shares at Rs 115.22 per share….Such were set off against ads in print & non print media spend

Interestingly also in FY 17  KKR Capital Markets India Pvt Ltd subscribed to NCDs of Rs 100 crs & also extended Term Loan..Security was Private Property & Promoter Shares … if you recall KKR was also jacked in JBF pumping in Rs 900 crs in Equity at Rs 300/share for a 20% stake in December 2015 . I had blogged on this .JBF at Rs 43 currently is competing with Kwality in continuing share price destruction with KKR seeing over 80% & over Rs 750 crs blown away inside just two and a half years !JBF ‘s FY 18 Results carry serious audit qualifications but accounts are yet prepared on a going concern basis as the company,among other measures,takes comfort in that it has signed a binding term sheet with KKR for infusion of funds in it’s subsidiary with change in equity holdings ! Wow !    

Minority Shareholders of Kwality deserve better disclosure & clarity on the real reasons for this continuing Share Price Destruction this year.How can the Exchanges accept Company’s explanation which effectively reads as “there is no explanation” !….agreed Equity Investments carry risks but such debacles destroy the credibility & sanctity of our markets

Clearly the key lies in the significant changes in Promoter’s Equity & Pledging details as on March 31,2018 from the earlier December 31,2017…the position has been rapidly changing even now

When 2018 commenced Promoters owned 15.22 cr shares or 63.94% of  Equity with 9.42 cr shares  or 61.91% of Holdings pledged.March 31,2018 shareholding shows Promoters holding lesser 13.22 crs shares or 54.76% of Equity of which 10.44 crs or  79.01% of holding was pledged

When I observed the Trading Pattern in 2018 it’s clear that the problem became alarming end March 2018 at price levels of Rs 90.The Insiders,in all probability even lenders who held pledged shares, clearly began exiting in the April to June 2018 quarter when defaults took place & collateral or pledge top up was either not done or was woefully inadequate.Daily Volumes of a few lakhs on BSE turned dangerously into seven figures & even topped One Cr shares on June 7,2018 & nearly 74 lakh shares on June 29,2018

Remember Lenders have a margin of safety on shares pledged while Equity Investors do not !…though it’s clear Lenders Margin of safety too eroded rapidly in the last quarter & perhaps there has been a suffering of loss of some principal too

Just today July 4,2018 Exchanges have received a notification that more pledged shares have been invoked by a Lender & as of date the Promoter holding has slipped to 12.25 cr shares or 50.74% of Equity.Of this holding over 95% or 11.68 cr shares yet remain pledged 

Kwality is clearly struggling real big time & yet again the bourses are presenting a superb case study developing on the significant disconnect between seemingly Profitable Operations with grand growth plans announced for the way forward in consultation with E & Y & the Share Price Destruction & upheaval caused by the risks playing up due to the sell offs of pledged shares in a situation where the Promoter was forced to pledge nearly all his holdings hit by the double whammy of falling share price & the requirement to top up

 

That is why there is an additional risk you have to factor in when Promoter Shares are pledged…& if they are nearly all pledged,the risk becomes that much more acute & pronounced & the shareholders burden  can become that much more heavier

If you survive Kwality do be careful in the future…Oh ! it’s pointless to warn because when the next huge Bull run dawns the same mistakes will be repeated by most for they will again fear they are missing the boat !…so if you have to be in Equity,stick to Quality…this is no pun

Perhaps you now understand why most of India’s Investing Surplus continues to remain in lower but relativeky safe Fixed Return Instruments,largely Bank Deposits…yes even in the stressed PSU Banks !

Cheers !

 

 

 

 

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