From Lanco Infra to Amtek Auto: Junk debt-heavy stocks, analysts tell investors

Given the debt, analysts see a bleak future for such firms and suggest investors steer clear of them

Lanco Infratech on Tuesday hit a record low of Rs 1.70, down 10 per cent, extending Monday’s 20 per cent decline on the BSE, after the company said the Reserve Bank of India (RBI) had directed its lead lender, IDBI Bank, to initiate the corporate insolvency resolution process for the company under the Insolvency and Bankruptcy Code .
 
Stock prices of seven of the nine listed entities (on the Reserve Bank of India’s most-indebted companies’ list) have seen price erosion of up to 40 per cent in the past one week. Besides Lanco, Amtek Auto, Bhushan Steel, Electrosteel Steel and Jaypee Infratech were down 8-40 per cent on the BSE in the past week. Of these seven, five are trading below or close to their respective face value.
 
In case investors are wondering if these stocks are worth buying now that they are on a major discount sale, experts advise against it. Given the debt mess that these companies are in, analysts see a bleak future for them and suggest retail investors steer clear of these scrips. For those who are already invested, it is a good time to book losses and exit, they advise.
 
“Even after repaying the debt, there will not be much left for the shareholders. Even if outsiders take charge, one needs to evaluate if the asset base exceeds the outstanding amount by a big margin. In some cases, I feel the value of assets will not be big enough,” said G Chokkalingam, founder and managing director of Equinomics Research & Advisory. His advice to investors is to stay away from such stocks for now. “Since the companies are loss-making and unable to service debt, the problem has no easy solution. Shareholders, I feel, will not benefit much out of this restructuring.”
 

Illustration by Ajay Mohanty

Besides the restructuring and possible revival, analysts say the fate of these companies will also depend on the business cycle of the sector each company belongs to. For instance, while analysts remain bullish on the steel sector, they prefer larger players with lesser debt on their books.
 
The Reserve Bank of India’s (RBI’s) list of 12 companies also includes five steelmakers — Bhushan Steel, Essar Steel, Bhushan Power & Steel, Monnet Ispat and Electrosteel Steels.
 
India has been a marginal net exporter of steel for the past 10 months, analysts said, and this has contributed materially to stronger-than-expected domestic pricing — a trend they expect will continue.
 
“Steel stocks globally have been relatively strong over the past one month and on year-to-date (YTD) basis Tata Steel and JSW Steel have been among the top-performing steel stocks. In our view, both these companies are ideally positioned in a growing domestic steel market with multi-year price protection in place. We would use any weakness to add in these names,” suggests a JP Morgan report on the sector.
 
Companies from the infrastructure space include Lanco, Era Infra, Jaypee Infratech, and Jyoti Structures; while textile firm Alok Industries, auto ancillary firm Amtek Auto, and shipmaker ABG Shipyard were also part of the list of 12 companies identified for resolution under the Insolvency and Bankruptcy Code (IBC).
 
“Ideally, investors should look for companies that have a good earnings track record coupled with low debt and a good return on equity (RoE). All these companies, on the other hand, are like a high-risk lottery,” said A K Prabhakar, head of research at IDBI Capital.
 
He said of list of companies that are suffering, only a handful can become multi-baggers in the long-run. “But identifying such a company is difficult, and only institutional investors are best fit for this role. Retail investors should stay away and those who are invested should exit,” he said.