ANALYSIS: Missing cash, shares and a promoter at Ashapura Intimates

Friday, Oct 26
    By Kunal Kamal and Krishnadevan Vijayaraghavan
    MUMBAI – It has been a puzzling sequence of events at Ashapura Intimates Fashion Ltd over the past month, during which the company has lost nearly 8 bln rupees in market capitalisation and its promoter and managing director is untraceable.
    Even before Chairman and Managing Director Harshad Thakkar went missing, following a stunning fall in the company’s stock price, there were clear signs of trouble at the lingerie manufacturer, which appear to have been overlooked by auditors, rating agencies, and investors.
    Thakkar, it seems, was using his stake in the company as collateral to make a quick buck in the share market, before it all went downhill when the bear-bug bit equities.
    A key disclosure related to pledging of the company’s shares was not available with the stocks exchanges, and could have led to his trading activity fly under the radar.
    Investors in the company include the DSP Mutual Fund-owned DSP Blackrock Midcap Fund, which has generated 14.6% returns since its inception. The fund owns 5.06% stake in Ashapura Intimates, whose share price has plummeted over 77% in a month to 97.50 rupees as of today.
    The company has received noticeable publicity, with media companies such as Bennett Coleman & Co Ltd and HT Media holding minor stake in the company, in likely equity-for-advertisement deals.
    The first signs of a crisis came to the fore when the company disclosed resolutions for its 12th annual general meeting, wherein it sought shareholders’ approval to allow promoters to forgo dividend and other corporate benefits.
    This is significant because the company declared final dividend of 0.75 rupee per share for 2017-18 (Apr-Mar), which means the promoter group–with 57.35% stake as on Sep 30–was willing to forgo nearly 11 mln rupees.
    The company has to pay nearly 19 mln rupees as dividend to shareholders in the coming days. Even if promoters forgo their dividend income, the company still has to pay more than 8 mln rupees to the remaining shareholders. To put this in context, the latest balance sheet of the company, for 2017-18, showed Ashapura Intimates had a mere 6 mln rupees as cash and bank balance.
    Even though the resolutions were disclosed to exchanges on Sep 3, the stock price was largely unaffected till the annual general meeting.
    On Sep 28, the day of the meeting, the stock slumped and was locked in the 20% lower circuit of 341.75 rupees on the National Stock Exchange, and has since been on a losing streak. All resolutions, including one seeking reappointment of Thakkar as managing director, were unanimously approved at the annual general meeting.
    Three days later, on Oct 2, Thakkar went missing. He was the largest shareholder in the company with 48.05% stake.
    Strangely, Thakkar’s family reportedly waited a week, until Oct 8, to file a missing person complaint with the Dadar police station in Mumbai, and this was disclosed to the exchanges on Oct 10.
    CARE Ratings downgraded the company’s debt on Oct 15, despite the fact that the company had informed exchanges nearly a week ago that Thakkar was missing.
    It seems surprising that the rating agency did not take cognisance of the fact that one of the company’s three key managerial personnel had disappeared.
    What is even more baffling is that the rating was not immediately put under watch despite the company disclosing on Oct 12 that independent director Anupama Sharma, the head of its three-member audit committee, had resigned a day earlier.
    Days later, another member of the committee, independent director Ramakant Nayar, also resigned–Thakkar was the third member on the panel.
    Finally, when CARE did downgrade its rating by three notches to “BBB-” on Oct 15, it also attributed this to the company’s inability to sufficiently reduce its debt levels, which had become evident nearly six months ago.
    For a relatively small-scale business, the company’s trade receivables and advances to suppliers are unusually high.
    As of Mar 31, the company’s outstanding income, or receivables, stood at 1.4 bln rupees, a 41.5% jump from a year ago. The company’s sales in 2017-18 rose at a much slower pace of 11.4% to 3.4 bln rupees.
    In fact, the company’s receivables are equivalent to its total sales in Jan-Mar and nearly double of those in the June quarter. They are also significantly higher than the company’s outstanding debt of 944.6 mln rupees.
    Even when compared to peer companies, the ratio of trade receivables to sales for Ashapura Intimates is significantly high. For companies such as Page Industries, KPR Mills, Dollar Industries, VIP Clothing and Lovable Lingerie, this ratio stands at 0.06-0.29, while for Ashapura Intimates, it is 0.41.
    This resulted in stretching of the company’s working capital cycle to 236 days in 2017-18 from 164 days the previous year.
    Another factor that seemingly went unnoticed by CARE for several months was the rise in the company’s current liabilities.
    Ashapura Intimates’ total current liabilities as on Mar 31 were up 17% on year at 1.2 bln rupees, largely because some term loans were up for repayment. The company’s current maturities of long-term debt stood at 272.5 mln rupees, nearly 13 times higher than at the end of March 2017.
    What could have exacerbated the problems for the maker of Valentine, TRICCI and Night & Day range of innerwear could be Thakkar’s doings in the stock market.
    Three brokerages–IIFL Securities Ltd, IFIN Securities Finance Ltd and Prabhudas Lilladher Financial Services Pvt Ltd–took control of promoters’ shares in the company amounting to 39.17% stake, which were pledged as margin for Thakkar’s trading activities.
    This is apart from the 10.04% already disclosed as pledged shares to financial institutions. 
    Collectively, this accounted for over 87% of promoter ownership in the company, which stood at 57.35% as on Sep 30.
    Another surprising fact is that the promoter’s shares offered as margin to brokers were not disclosed to exchanges as pledged shares, before the invocation.
    These brokers took over ownership of the pledged shares to settle Thakkar’s dues arising from losses in the stock market, amounting to at least 500 mln rupees.
    Brokers liquidate pledged securities if a client fails to meet the margin call, or does not make the payment on the day after the margin call has been made, or where a cheque deposited by the client has been dishonoured.
    According to regulatory norms, a broker may also liquidate the securities in case the client’s deposit in the margin account–after adjustment for marked-to-market losses–falls to 30% or lower than the latest market value of the securities, in the period between making the margin call and receipt of payment from the client.
    With the pledged shares now having been invoked by the brokers, promoter group shareholding in the company appears to have fallen to 8.14%.
    Various media reports said Thakkar left a note written in Gujarati, addressed to his family and friends, saying he had mortgaged his personal wealth to buy back the company’s shares, in a last-ditch attempt to shore up the stock price.
    This could not be corroborated with data related to trading activity in the stock.
    Interestingly, Kotak Mahindra Investments acquired 53,000 shares in the company on Oct 1, at 273.40 rupees each through a bulk deal on the NSE. It is unclear who the seller was.
    Now, Thakkar has been missing for over three weeks and it seems he has not left much behind, for shareholders or for the police, apart from a cellphone, a wallet and his Indian passport.  End

Edited by Akshit Harsh

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