Lost in transit

Financial mismanagement and governance issues have taken the wind off Arshiya’s sails for good

It’s the stock market equivalent of a train wreck — enormous damage and bystanders watching in fascinated horror. In December 2012, Arshiya International was one of the top five stocks Kotak Securities recommended for 2013, assigning a target price of ₹188 — it was trading at ₹120-130. Just a few weeks later, wham! A report in a national daily sent the stock crashing into the lower circuit on January 9. By March 12, it had declined to ₹29.65, an over 76% fall. Most brokerages have suspended coverage of the stock now and the future looks singularly bleak. Could one small news item really do so much damage to a stock or is there more to the Arshiya story than meets the eye?

First, though, what is Arshiya? The Mumbai-based company’s claim to fame is the country’s first fully functional free trade and warehousing zone (FTWZ) at Panvel outside Mumbai, where goods can be imported and stored for clients ranging from auto giants, pharma companies, luxury goods and consumer electronics brands. The ₹1,046-crore company is also the second-largest private rail player in India after Gateway and Concor. It’s a fairly well-known name in investment circles, with star fund managers like Samir Arora of Helios and Dron Capital’s Pathik Gandotra having put money into Arshiya. 

From the looks of it, though, even they were taken aback when a national newspaper reported on January 9 that over the preceding weekend, Arshiya had fired 290 employees, many of them at senior levels. Anonymous ex-employees claimed salaries hadn’t been paid since September 2012 and that vendors, too, were owed substantial dues. The most damaging allegation, though, was that Arshiya had misguided investors, lenders and other stakeholders. “Inside the books, the company is hollow — it is a mini-Satyam,” one sacked employee charged.

The company clarified immediately that it had “terminated the services of a few employees based solely on their performance and our internal need to rationalise employee costs”, adding that the allegations of financial irregularity were baseless — but nobody bought the story. “Many are questioning the authenticity of on-ground assets and whether the FTWZ land in Panvel and Khurja is in the company’s name or not,” says an analyst with a leading brokerage firm. Yet another admits that the investor community was caught unawares by the company’s actions. “Working capital issues had to have been on for a while for salary problems to start but the management continued to paint a rosy picture even until Q2 results. This makes the numbers in their books suspect.” (See: Not adding up)

Arshiya hurriedly organised a concall with the investors where founder and CMD Ajay Mittal declared, “I deny all of this; there are no irregularities. There have been certain delays with payments here and there, which is normal in the life cycle of any company; but, besides that, there have been no issues whatsoever.” Tellingly, though, there was no mention of legal action against the newspaper that had caused so much wealth erosion for the promoters. There’s also no sign of the company declaring its Q3FY13 results any time soon, although the fiscal year is nearly over. As damage control measures go, this fell way short of expectations and two months later, the stock is still slipping. 

What went wrong?

Arshiya’s troubles started when a bank (Punjab National Bank, as per sources) cancelled the loan facility for the company’s phase 2 development at the Khurja (Uttar Pradesh) FTWZ in October 2012, despite having earlier agreed to financial closure. The burden on the company immediately shot up from the estimated ₹100 crore to ₹160 crore and Mittal mentioned during the concall that Arshiya will have to pay an even further ₹25 crore towards contracts signed after the financial closure (the company already has debt, including working capital, of about ₹2,430 crore on its books as of September 2012). “The bank pulling the plug on the credit line itself raises questions on the credibility of the projects,” points out an analyst. “It may have seen issues we as investors don’t see.”

What nobody missed were project execution delays at Khurja; it will be another three months at least before it starts contributing to the topline. “Capital infusion of ₹850 crore is not seeing any revenue generation. With further delay expected, the financial health of the company would be under pressure,” explained Emkay Global in a note to investors on January 11 after the concall.

Arshiya’s highly-leveraged balance sheet has long been a concern; now analysts fear it may need to take on more debt to make the existing capital expenditure work. At the Panvel FTWZ, of the estimated ₹1,500-crore investment, nearly ₹1,200 crore has already been spent on land acquisition, levelling the ground, and construction of five state-of-the-art warehouses and dedicated rail services. “The company will need another ₹300 crore for four more warehouses to achieve the operating margins on which it has based its debt repayment projections,” predicts an analyst.

For now, the Khurja expansion has been shelved. “I do not intend to go ahead for at least six months or a year, year and a half, till all assets have been sweated to the maximum,” Mittal told investors. That means Arshiya’s growth will be slower and its profitability and capacity to repay loans will be affected as well.

Experts point out that this was a disaster waiting to happen. Gaurav Parikh, co-founder of Jeena Scriptech Alpha Advisors, says his company had recommended an ‘avoid’ call on the scrip even before this turn of events. “This mid-cap company was behaving like a large-cap company. With just ₹550 crore net worth, an RoCE of 10% and a relatively high debt-equity ratio, Arshiya had been taking on projects worth thousands of crores. Sooner or later the debt-equity issues had to crop up,” says Parikh (see: Debt trap). 

Saving grace

Efforts are now being made to salvage both, the company’s finances and its reputation. The promoters, executive director and chief financial officer announced they would forego half their pay from October 1 last year and at a board meeting on January 19, the company decided to go in for corporate debt restructuring, for which it has appointed SBI Capital Markets as advisor. Sources within the company say the CDR has been approved in principle and is under process.

But it may not be enough, warn analysts. “This will be only a temporary relief unless cash flows improve significantly. A CDR may let the company pay instalments later but it still has to pay interest on the debt.” For the half year ended September 2012, Arshiya’s interest expenses stood at close to ₹94.9 crore, more than double the ₹42.4 crore for the same period last year.  

In the concall, Mittal announced that the company was working towards improving cash flow and reducing costs. Apart from firing employees, it is also asking debtors to repay faster. 

Why now?

Arshiya’s debt-laden books are old news. So, was the nose dive in its stock price warranted? Emkay Global doesn’t think so. “We agree with management’s stance that things are blown out of proportion,” it wrote. “There are some decisions where the company has gone wrong, leading to much more harsh decisions.” Not everybody buys that argument, though. “Despite such massive debts, the company declared 70% dividend in July [on a face value of ₹2],” points out a visibly disgruntled former employee. “The owners are definitely not playing straight.”

It is believed that most cases of mid-cap share price plunges involve large-scale selling of pledged shares wherein lenders sell shares to recover their money. Arshiya could have faced similar pressures. The promoter group held about 43.5% stake in the company as on February 19. In the January 10 concall, Mittal informed investors that about 62% of the overall holdings was pledged. 

In an earlier interview with Outlook Business, Mittal had said that he had pledged his shares for funds to shore up his holdings in the company and called it a measure of his faith in the company. But, as the events that followed proved, it was a bad idea. The sudden sharp fall in the Arshiya stock triggered margin calls for many. An unknown pledgee sold 3.61% of Arshiya’s shares in the market between January 9 and 30, while FIIs like Merrill Lynch and Swiss Financial Corporation too offloaded their holdings as the price fell. 

Making matters worse is the perception that some promoters work with market operators to reroute the money raised through margin funding or pledging of shares to pump up the stock price. But when promoters cannot raise more funds and the operator needs to wind down his positions in a hurry, the cracks start to appear and the result is an Arshiya-like fall. 

For Arshiya to woo investors back will require some serious efforts. More than the CDR getting ratified, an approval from the auditors is the need of the hour. If one were to look at the trailing 12-month EPS numbers, the stock is quoting dirt cheap at 1x P/E and less than 1x book value. But, given that the numbers are suspect, it would be foolhardy to approach the stock as a value buy. In other words, investors are warned against bottom fishing in muddled waters.