Deepak Jain inquires about what to do with Alok Industries at Rs 21 as he’s sitting on a huge loss having bought at Rs 32….Interesting case

Alok Industries at Rs 21…Interesting case….Deepak Jain asks what should he do as his Purchase price was Rs 32 and he’s sitting on a huge loss

Well Deepak,Alok Industries has not exactly set the bourses on fire as it has not delivered to shareholders for years….but I noticed that it was only in November 2010,a few months ago it touched a 52 week high of Rs 35 and since then has slid to Rs 20 levels….I am therefore assuming your entry into Alok Industries is fairly recent….you are concerned at this ‘huge’ loss as you put it…clearly your Risk Profile should not have allowed you to begin any big exposure in Alok….as you seem to be sweating on this fall inside months

You have four options before you and I suggest you consider them keeping in mind your risk appetite

  • Immediately Exit fully at a Loss
  • Immediately Reduce Exposure by exiting partially at a Loss
  • Hold and Hope
  • Exit fully or partially when a nice Switching Opportunity presents itself

I would seriously consider the fourth Option

An Insider…with Decades of Experience in the Textile Industry…had warned me about Alok Industries several years ago….they simply do not have any USP Product Line and have to compete at extremely tricky margins that cannot become a sustainable model even if they attempt to play the Volumes game

This is what Alok Industries appears like to me…..it exists to just about survive and earn for all stakeholders,except for Non Promoter Shareholders !…it’s got into this warp and mindset functioning and will find it difficult to exit from it and start really adding genuine value to all Shareholders who are also part owners of the Company…so simply disregard all their ‘greening’ up of the Annual Report….In fact can you recall any Alok Brand !

The Promoters,Jiwrajkas continue to remain overly optimistic and even make tall claims and boasts despite conflicting realities….have a look at their Annual Report for 2009/10….”Doing More for Less” is their assertion…Hardly…..”Doing Less for More” is more like it….”Created value beyond economic profitability for all stakeholders ” is their other assertion…judge for yourself from below

 

Payouts in Rs Crs to Stakeholders in FY 2009-10

 
 

Stakeholders

Rs Crs Payout

 
 

Lenders

535

 
 

Government
(Direct Taxes)

127

 
 

Promoters
Salaries & Commission
(see below table)

12

 
 

Employees

154

 
 

Shareholders
Dividend of 2.5%=> Rs 0.25/share => less than 8% of Net Profit of Rs 247 crs

19.69
(of which 5.58 crs go to 20 Promoter Group Shareholders as they hold 28.35% of the Equity)

 

 Payouts in Rs Crs  to Promoter Directors

Director

Salary

Commission

Total

Mr. Ashok B. Jiwrajka  ,
Promoter Executive Chairman

1.8

1.25

3.05

Mr. Dilip B. Jiwrajka ,  Promoter
Managing Director

1.8

1.25

3.05

Mr. Surendra B. Jiwrajka , Promoter
 Joint Managing Director

1.8

1.25

3.05

Mr. C.K. Bubna ,Executive

1.8

1.25

3.05

 

7.2

5

12.2

             

    There are over 177000 shareholders ! and Deepak you are in good company as several FIIs,DIIs and Banks and MFs are shareholders…have a look at some 

ALOK INDUSTRIES LTD.

 
Scrip Code :  521070

Quarter ending :  December 2010

 

Shareholding belonging to the category
“Public” and holding more than 1% of the Total No.of Shares

 
Sl. No. Name of the Shareholder No. of Shares Shares as % of Total No. of Shares

1

 Caledonia Investments PLC

47,825,714 

6.07 

2

 Caledonia Investments PLC FDI

45,184,354 

5.74 

3

 Life Insurance Corporation of India

26,964,136 

3.42 

4

 IFCI Ltd

21,440,823 

2.72 

5

 Axis Bank Ltd

19,650,000 

2.49 

6

 Sloane Robinson LLP A/c SR Global(arutius) Ltd (Class B Asia)

15,821,592 

2.01 

7

 CLSA Mauritius Ltd

13,217,102 

1.68 

8

 State Bank of India

12,790,823 

1.62 

9

 IL&FS Trust Company Ltd A/c IL&FS Pvt Equity Trust – Leverage India Fund

12,602,457 

1.60 

10

 IDBI Bank Ltd

10,788,161 

1.37 

11

 LEGG Mason Southest Asia Special Situation Trust

9,500,000 

1.21 

12

 Macquarie Bank Ltd

8,330,000 

1.06 

 

 Total

244,115,162 

30.99 

On the face of it all the above seem genuine Investments and not fronts…maybe ,Deepak,if you have access to anyone of these above shareholders,ask them why they are holding Alok Industries !?……. but it was amusing to note that in April 2009 when Alok Industries launched a huge Rights Issue of Rs 450 crs for just Rs 11 per share in an 83:40 ratio,it was subscribed just about 1.15 times !….In March 2010 it was able to do a QIP at Rs 23.32 per share for Rs 425 crs….In the Heady Years before of 2007-8 the FCCB Conversion was done at Rs 61.5875 and Preferential Allotments to Promoters  at Rs 102 per share !

Alok Industries will cross a Billion Dollar of Sales this year with a little more than one third being exported…However it continues to face these major hurdles

  • High Debt on the Books….At March 31,2010 The Long Term Borrowings were Rs 6437 crs while Short Term Borrowings were Rs 2073 crs aggregating Rs 8510 crs…the Networth was Rs 2716 crs with Equity at Rs 788 crs and Reserves at Rs 1928 crs….so Leverage is a burden…..and rising Interest rates,falling operating margins will only add to this burden…..Interest Cover is struggling to stay over 1.5….would get precarious if it swerved towards 1
  • Low Operating and Return Margins….Net Margins are falling and are below 6%….ROE too has been declining and struggles at below 9%…this is despite Alok Industries being an Integrated Textile Player across all segments…Cotton and Polyester Yarn,Apparel Fabrics,Garments and Home Furnishings  
  • Real Estate Investments through Subsidiaries….Three Properties are under development…0.6 m sq ft at Peninsula Business Park at Lower Parel costing Rs 1275 crs…Ashford Royale Residential Complex at the Seven acre Nahur factory site of CEAT with a saleble 1.02 m sq ft costing Rs 450 crs…and 60000 sq ft at Ashford Centre at Lower Parel soting Rs 125 crs…Monies are blocked here and real estate sector is facing a huge slump in Demand at higher Levels…prices thus must drop for some sanity to return…to add to this are rising Interest rates and severe tightening in Real Estate Lending  

At March 31,2010 the Book Value was Rs 34 and with CMP at Rs 21 the PBV is 0.6….At March 31,2011 this Book should move past Rs 38 bringing PBV yet further down towards 0.5….while EPS Levels are at Rs 4 + giving a 5 PE Multiple….this is what is sustaining Investor interest and Hope and is capping the downside from Rs 21  

Alok Industries at Rs 21…Interesting Case…I would not be a buyer….and if I hold it I would be a seller only for a good switch !…Volumes are interestingly kept alive on the bourses…2.4 million shares traded on BSE today with a two week average of over 1.7 million shares a day….yet it’s a relatively low Beta scrip

Interesting Case….

….and Deepak…Hope I’ve helped you make up your mind on how to go forward with your holding in Alok Industries….do stay true to your risk profile and you’ll sleep well all nights..If you yet have a strong conviction,after revisiting and reviewing your selection basis and asumptions, that Alok Industries was a good selection even at Rs 32,then have the temperament to hold on for gains in the coming months and years…Averaging at Rs 21 will increase your exposure while reducing your holding cost…but it’s a good strategy if your conviction is very very strong….Mine is simply not…I go in this order when assessing or evaluating Investment Potential…Promoters,Business Model,Financials,Valuation…the first three have thrown up issues highlighted above…so I tend to disregard even a Low Earnings and Book Multiples Valuation as being the deciding criteria for investment…the Market is not a Fool…..when in doubt stay out

Cheers !

 

5 thoughts on “Deepak Jain inquires about what to do with Alok Industries at Rs 21 as he’s sitting on a huge loss having bought at Rs 32….Interesting case

  1. Hi Deepak,

    I have been reader of your for quite sometime now.
    You bought a good point here about the order of order of things that you look into. So, my question is how do you evaluate the promoter ? What material do you look for on the promoters ?

    Regards
    Raja

  2. Hey Raja…no issue with the name goof up…simply follow the marriage analogy when ‘Raja’ seeks ‘Rani’!…when you plan to marry a Company,you’re actually marrying the Promoters….you can assess them both Objectively and Subjectively….Past Perfomance…Delivering on Promises….Intention and Ability….Business Acumen in running their Companies in a Competitive world…Capturing Opportunities early…Scaling Up…..Building Class Teams and Brands…..Domain Expertise…..Corporate Governance…Substance over Form…Personal Lifestyles….Personal Benefits from the Company….Reputation in Business Circles and among Employees…Personal & Professional Ethics and Mindset…do the ‘Means’ matter towards the ‘End’…selfish or selfless,visionary,intelligent,manipulative,scheming,win win for all or only a few……are competitors treated with respect….Nepotism and Bias prevails over Merit….often one can assess Promoters quite easily and early too…but not alway…sometimes we learn from mistakes when trusts are betrayed or we are let down by History…for example Biyani created wealth for all with ‘Pantaloon’ and Big Bazar Retail Forays initially…then he launched ‘Future Capital Holdings’ with an ex Goldman Sachs head Sameer Sain…and all shareholders have been royally sc..w.d…here the second parameter of assessing the Business Model would have saved you from subscribing at the obscene IPO Price of over Rs 700 in the Jan 2008 IPO…it’s Rs 140 now…you may have become God in your previous venture but I’m going to assess you from Scratch in the New One !….having said all this,I do often fall back on Instinct too……if the opportunity seems too good to miss….Cheers !

  3. Brilliant analysis !! I too hold Alok at Rs 25/- and like Deepak i too was in a fix. Such candid analysis is refreshing . thanks

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