Would you invest in this Company ?? (Indian Bankers love it)

Here is a tricky and tough(if you can call it with these terms) question for you regarding investing in a particular stock –Will you invest your money to buy stocks of a company whose performance summary is following :

  • Talking about consistency it has made consistent losses(Negative Net Profit) for last 7 years with losses increasing from Rs.16 crores to 1600 Crores.
  • The cumulative total Net Profit it has made is grand sum of Rs.2 crores on a cumulative 3 year sales of Rs.105 Crores in years 2002-2004.
  • Total cumulative losses for last 7 years are equal to almost Rs. 5248 crores ONLY.
  •  It has NEVER been a free cash flow company in its entire history of existence and its almost impossible that it will have a free cash flow in the coming near future.
  • It has a negative net worth for last 3 years and almost sure to have negative net worth in coming 2 years at least.
  • It has NOT paid a dividend till date (don’t start to argue that it is behaving like Microsoft, Google or Berkshire) not because it was investing the profit for greater return in business but purely because it just CANNOT pay dividends.
  • It is unable to pay back and manage even its working capital to an extent that it has changed working capital limits to working capital term loan(in plain English not enough money to pay you now ,come back after some years).
  • Forget working capital it is even unable to pay interest on the loans taken and hence it converted interest on loans from banks funded interest term loan repayable in 9 years including 2 years moratorium (plain English I am bankrupt to an extent I cannot even pay interest even in next two years, and banks happily said YESSS. Try saying to ICICI or SBI that you cannot pay EMI on your home loan because of some emergency in your family for say 6 months or so and see the fun!!!!They will first grab your collar, then your neck, then your house and then they will start talking!!!)
  • After being unable to pay money due on time and amazingly ‘requesting’ and getting banks to postpone paying up, the company has in fact been able to secure even more debt from the same bankers.(Try doing that with your car loan or house loan where after you default on payment of even miniscule amount or just a small delay– you are going to be kicked out of office of any bank where you go for loan almost forever or charged a rate which would be absurd).
  • Forget paying someone whom you owe money to, the company has gone a step further in NOT paying the TDS (worth 422 crores) and service tax for such a long term(greater than 6 months) that auditor had to mention it in Annual report . (You poor salary earning individual , you do not have a choice , you get the money only after the govt had its cut through the company. Alas the govt can also be fooled by companies like that who take your money and keep using it for as long as possible. )
  • A company which actually tried to raise more money than its whole market cap via GDR. Can you believe the ambitions and positive outlook of the company??(Of course you guessed it right what would have happened to GDR )
  • The company is so asset starved that security includes intangibles like the Brand name of company(Word secured has a different meaning for these bankers who have lent money).
  • Its a company (not a bank) where its Chairman says “realistic estimation of total assets both quoted and unquoted (carried in the Balance Sheet at cost) would exceed Rs 12,000 crores but the market value of the company is around 1/10th of the estimate by the Chairman.(So either market is stupider by 10 times and Chairman is wiser by 10 times or vice-versa ).
  • It is perhaps the only company which in its annual reports shows performance comparison to NSE and BSE by showing the ‘Volume’ of shares traded. Yes that’s volumes of share traded and NOT the price because if it shows the price then it would look ‘interesting’ to the say the least.  
  • A company which has consistently been defaulting/delaying payments to oil companies for last 3 years with so many instances appearing in newspapers like “XYZ state run oil company is cutting off the fuel supply to company” . It seems now this is so normal that newspapers will not even deem it to be news and not report it altogether. And oil companies have put company on Cash and Carry.Just last week again HPCL stopped fuel to airline but now things are again normal (plain English Hey Mr. company In God we trust Rest all Pay Cash. Give me cash and I will give you oil )
  • To top it all  the airports Delhi and Hyderabad also almost put company on Cash and Carry because the company just would not pay .
  • A company which has lost 75% market value in 1 year when Nifty has lost around 20%.
  • It’s in a industry which has best track record of destroying capital to an extent you can imagine by reading following quotes from two of the best businessmen ever :
    • Richard Branson- Whats the quickest way to become a millionaire? Start off a billionaire and set up an airline.
    • Warren Buffet – The money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.

So now you have the question and a hint that it is indeed an airline company from India and its none other than the King of “Good” times Kingfisher Airlines.

So based on the above highlights of the company I think maybe you will not invest but who knows if you are eternal optimist on airline stocks you might.

Goodies on Your Lucrative Investment Idea

Now if you have decided to invest (I assume you are rich) then you have to invest a huge amount to an extent you will own around 23% of the company or almost greater than Rs. 1400 cr.

You may think oh somebody really needs money and big money so maybe I will think again before putting such huge amount of money at risk.

To add the icing on the cake I will again say –“OK you are ready to invest almost Rs. 700 crores but you not be able to invest at market prices which available on stock exchange but you have to invest at a premium to the shares which are listed. What about a premium of about 60% to the closing market price?? How does that make you feel about your proposed investment?

Now to a little more of a sweetner what if I told you that actually some years ago you had loaned the company some Rs. 1400 crore rupees and since company is almost bankrupt it just  CANNOT to pay you cash . So instead of paying you cash the company is saying –“Hey why don’t you convert your Rs. 1400 croroes of loan into equity at a 60% premium to the share price??”

What will you do now??

Or is that even a question which should be asked to any human being?? Forget the fact that initially somehow you had Rs. 1400 crore and intelligent enough brain to loan the money to the company in first place and now to make amends you are being given stocks in a company with highlights as shown above and that too at a 60% premium .

But as I told you earlier the “YOU” here is consortium of bankers lead by our own SBI (11 of the 13 banks are government-owned or being owned by normal people who pay taxes and when recapitalization{read taking your taxes and giving to bankers} time comes they are the first in line at offices of govt).

And Lo Behold – This is exactly what the bankers did . Banks now own almost 23% of Kingfisher airlines . With magic of debt to equity conversion suddenly Kingfisher has reduced its debt by almost Rs. 1400 crores . On top of this banks have even decided to lend more to the company and reduce the interest rates on already existing loans when the whole of India is crying for help from RBI to stop raising interest rates.

Its truly Alice in Wonderland

To give you an analogy.  Its like say your bought a house with a bank loan and the house price is going down and you have lost your job and cannot pay EMI. So what do you do ?? Well ideally it’s the bank which should do something instead of you but read me out .

Initial Price of House – 25 lakhs

Downpayment – 5 lakhs

Loan of 20 lakhs

You go to bank and say hey

You(Kingfisher) :Hey Mr. SBI and all other banks I cannot pay my EMI

 SBI :, Fine no problem . Let me see .I had loaned you 20 lakhs . Current value of your house (which has been declining continuously from 25 lakhs initially for last 3 years ) is around 20 lakhs .

So you need not pay EMI but I will take 23% of your house at a premium of 60% to market price (according to some rule/formula laid by SEBI) ie you need not pay Rs. 7.36 lakhs of EMI at all as I own  a part of your house now .

You(Shocked in a positive way) : Thanks a lot SBI but how did you arrive at 60% of a premium to market price ?? Are you being generous or is there a catch??

SBI: Oh nothing, you know  “The conversion has been done on the Sebi (Securities and Exchange Board of India) pricing formula. Banks have no say in it”. I cannot do anything because by a ‘formula’ I am obliged to buy something which has readily available price on market at a 60% premijm

You: OK (thinking SEBI has a formula oooohhhhhhhh a formula for stock pricing. Does Warren Buffet know it ? Who else knows that ?? Man I am going to get some more loan then )

You(Just checking if it’s a dream or not): Can you loan me some more amount you know to pay for my Nightlife, Cricket Team, Formula 1  and my son’s hot girlfriend .

SBI(Smiling): Oh yes that’s what we are here for . After having accepted your generous and preference offering of converting our debt to equity I am ready to finance you for all your extravagance.

You(Shocked again in a positive way but tries to check finally if it’s a dream or not) : You know RBI has kept on increasing interest rates for so many quarters I have lost count . Well having got all the loans will you please reduce the interest rates??

SBI(Smiling Even More): Your wish is my command Sir . I will reduce interest rates by 3% even though interest rates are highest in almost a decade now(try asking this kind of favour from banks of reduction of Education Loan interest by 3% and see their response).

SBI is thinking following things : (If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.) Man if I do not take the equity at 60% premium this will show up as NPA in my accounts. Oh god my bonus might be affected . I am already around 55+ and will retire in 3-4 years from now. Let me convert the debt to equity so that everyone will be happy (taxpayers be screwed) and I will get my year’s supply of Beer for free from this guy.

 

Fast forward to today – just some months from the grand equity investment by the big ‘intelligent’ bankers of India. The company’s share price has more than halved from the day they purchased the shares at a 60% premium. So here’s a little math for you to calculate the current losses on bank’s books:

Mkt price on day of purchase: 39.9

Actual purchase price: 64.48

Current Market Price – 20

Loss approximately 70%.  But you know what banks are intelligent and will say this is not a loss – its “transitory” (borrowing words from the biggest banker of all- Ben Bernanke). Kingfisher airline will come back with a bang and we as a bank who have absolutely no business investing in equity will actually make a profit when share price of Kingfisher will triple from here on.

Oh wait a minute. Kingfisher just announced it is grounding its Low Cost Carrier business[i]. So this means a large portion of their purported revenues stream is going to be cut off. The bankers should have been knowing this before making the deal else how do the bankers hope the share price is going to triple when one whole business section of airline is going to be stopped completely.

To this bankers will say – you know since low cost operation was making losses and hence when you close that you will suddenly start making profits . Optimism at its best!!!

My questions are following

  • Will the bankers who have used the deposits of we fellow normal ‘mango’ people to buy equity/shares now pray and hope for a miracle which turns around Kingfisher to an extent the share price will triple??
  • When was the last time the board members who approved this kind of deal saw share price of any company (which is in as dire strait as Kingfisher and as bad a industry like Airline) triple ?
  • When will bankers finally accept the losses in reality on their books rather than just use accounting gimmickry to say everything is fine with those thousands of crores of loans lent out to bad business??
  • Will the institutional investors who have invested in the Banks question this kind of atrocious dealing by banks?
  • Indeed if the banks thought it good enough to pay 60% premium to price of Rs. 39 then here is my investment idea to banks- Load up kingfisher stock now because the price is half i.e. 20 . I as a depositor will love depositing money into SBI and consortium so that they can go to equity markets and buy Kingfisher stock.
  • Does anybody know of any large institutional investor or a bank that has made even positive return in a Airline stock over a 5-8 year period?
  • Have the board members really done their fiduciary duty in an honest way while approving this deal?
  • The annual report has said company has used short term borrowing to purchase long term investments– am I reading something wrong here or it is just normal for businesses to do this and Bankers to approve loans (to top it off with equity purchase )to these kinds of companies ??

It really pains me to see this kind of behavior in India by bankers which I guess are taking cues from the US banking where you can do anything and by using ‘legal’ accounting methods mask the real truth. I hope people get to know how outrageous dealings are done and people get away with it so easily.

About amitkumarblog

Will update later !!!!!!

Posted on October 18, 2011, in Banking, Economy, Finance, India, Uncategorized and tagged , , , , , , , , , . Bookmark the permalink. 2 Comments.

  1. Kingfisher to cancel 31 flights daily till 19 Nov
    http://www.livemint.com/2011/11/07233937/Kingfisher-to-cancel-31-flight.html
    Its unbelievable that company has put in a strategy where it plans to cancel 31 flights daily for the next 12 days, exposing passengers to the risk of being stranded in the middle of the peak season for air travel and opening the possibility of fare increases .
    Absolute crap of a company and management . Of course the bankers led by SBI consortium should feel happy that their “amazing investment” based on “cash flows” of the company whose share price needs to triple just for bankers to break even .
    I mean i dont even have words to describe what kind of mess the company is in and who is taking care of the hapless passengers who are going to be charged exorbitant rates for their travel . Pathetic .

  1. Pingback: Dish TV India Analysis- Bright Future ?? | amitkumarblog

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