Ganesh Benzoplast
Aaron Chaze & Deepak Singh Tanwar
Ganesh Benzoplast is one among a multitude of companies which have failed investors badly. When the company came out with a public issue in 1994, the shares hovered around Rs 220. But after the public issue, the stock has been on a steady decline. In fact, the stock recently touched a four-year low of Rs 13, and may continue on its downward journey.While the financial performance of the company has not been up to the mark, despite rapid growth, it is not the only factor which has affected the performance of the stock. Revenues grew from Rs 40.70 crore in 1994-95 to Rs 80.56 crore in 1996-97 at a compounded growth rate of 24 per cent, while net profit rose from Rs 9.85 crore to Rs 26 crore over the same period at a compounded annual growth of 27 per cent. Despite such remarkable figures, the company managed an extremely poor return on capital of just 7.9 per cent and 7.1 per cent in the preceding two years, enough to drive away the most optimistic shareholder. Although the profits as well as the sales
figures were in line with the projections till 1995-96, the same went haywire in 1996-97. As against the projected sales and net profit of Rs 156.11 crore and Rs 63.83 crore respectively, the actual figure stood at Rs 80.56 crore and Rs 26 crore, short of the target by almost 60 per cent. As far as the quality of the earnings goes, a major boost has come from other income in the previous two years. Other income as a percentage of pre-tax profits stood at 22 per cent and 27.5 per cent in 1995-96 and 1996-97. In the first six months of the 1996-97, other income was 16 per cent of the pre-tax profits. Coming back to the stock performance, what has hurt the most is the blatant over-pricing of its public issue apart from the active speculative element present during that time, which induced a lot of people to buy. The 14 per cent fully-convertible debentures (FCDs) offered subsequently were to be converted into two equity shares at an average premium of Rs 85 (Part A Rs 10 plus Rs 65, Part B Rs 10 plus
105). Otherwise, why would a stock which had been getting a discounting of around 6 times its historical earnings until March 1994, attract a P/E multiple of 25 plus just prior to its public issue. These facts have served to hurt sentiment in the stock during the last two years and on the current price of Rs 15 based on the latest earnings, the P/E works out to just 1.7. And deservedly, the discounting will continue to be lower in the future. Titanor Components: poor returns But while the equity markets have suitably penalised a company like Ganesh Benzoplast, companies like Titanor Components have escaped a lot of deserved punishment. Shares of Titanor Components, though trading at a 52-week low, still enjoy a price-to-earning (P/E) ratio of 13 times at its current price of Rs 31. The fact that Titanor's return on capital employed is a pathetic 7-8 per cent has been ignored by the market. What seems to have helped Titanor is the fact that the company belongs to an MNC group, and this may be
the sole over-riding factor as far as the equity markets are concerned. That aside, in an attempt to consolidate its activities and perhaps reduce costs, the company chose to relocate its manufacturing activities to its new factory in Goa. But in doing so, the losses and incidental charges of Rs 1.80 crore that were incurred are being amortised over a period of five years rather than being charged to the profit and loss account, resulting in an overstatement of profit for the year. To make matters worse, like a lot of other companies, Titanor Components too was hit by rising receivables and inventories, and being a supplier to public sector units (PSUs) and various municipal corporations and government bodies means a progressive worsening of liquidity. The company's response to these developments was to make an issue of equity shares, making worse an already shabby return on its equity. The current fully diluted return on equity (RoE) is just six per cent which can only get worse.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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