Monday, August 14, 2017

How to Evaluate a company.....Part 3

The rogues

We have analysed 7 companies which destroyed shareholder wealth due to promoters' and managements' incompetence and greed. Read what we have learnt

The rogues
In developed countries, while most businesses are run by professionals, in India, most listed businesses are managed by promoters themselves. At times, there are situations where the business is doing well and the products are good but the promoters' greed proves to be the Achilles' heel. The promoter may try to extract as much as possible from the company by hook or by crook.
On the brighter side, the interest of the business is aligned with the interest of promoters when the promoters are at helm.
A management with poor skills or mala fide intentions can bring the complete business down to zero in a matter of days whatever the prospects of the industry. On the contrary, a good management can build a strong business, even in adverse times. For example, in the airlines industry, while Kingfisher completely vanished due to an incompetent management, Indigo prospered.
Following are some companies which destroyed shareholder wealth due to promoters' and managements' incompetence and greed.
Bilcare
Bilcare is one of the largest blister-packaging companies in India. Its problems started when it acquired the plastic-film unit of the Swiss-based Ineos for Rs 607 crore in 2010, which was a much bigger firm than itself at that time. The acquisition turned sour and took the consolidated margins down. In FY13 and FY14, the management was quizzed for dubious accounting practices as well. Its working capital requirement kept growing swiftly. In FY14, the company was declared a wilful defaulter.
The rogues
Birla Power Solution
A part of Yashovardhan Birla group, Birla Power manufactured generators. The company defaulted on the its debt. It also had significant financial transactions with group companies despite having unrelated businesses. The debt taken for a power project was used to provide money to the group companies for different reasons. Apart from this, huge investments were made in foreign assets with little operations. The promoter of the company, Yash Birla, is famous for his flamboyant lifestyle and partying.
The rogues
Educomp
Educomp markets equipment for educational training. In its greed for high growth, the company changed its business model from an asset-light one to a leveraged one. In this attempt the company took huge loans and started struggling. The management and promoter were questioned for corporate governance when the CFO's resignation was followed by the company secretary's and compliance officer's resignations in 2012. The very same year, a related company Edusmart witnessed four consecutive resignations.
The rogues
FTIL
Financial Technologies, now called 63 Moons Technologies, was embroiled in a Rs 5,600 crore scandal. Its subsidiary, National Spot Exchange, a commodity exchange, was involved in a Ponzi scheme, along with its founder Jignesh Shah. The company offered paired contracts which were floated without the permission from the commodities regulator. The company also issued fake warehouse receipts to show the underlying commodities. The company also didn't publish its consolidated results on a quarterly basis.
The rogues

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