Pledged shares take a toll on Arshiya

Pledged shares have hurt many companies, the latest being Arshiya International, which continues to see a fall in market capitalisation. In the last five trading sessions, the company lost about Rs 400 crore in market capitalisation. Even at the lower circuit of Rs 56.90, there is a huge queue of pending sell orders.

“There could be lot of pressure on account of the pledged shares. Once the company is in the news for bad reasons, who is going to buy? The stock lacks confidence and if there are no buyers, the supply wouldn’t be absorbed and that would exert pressure on the stock,” says Kishor Ostwal, chairman and managing director, CNI Research

S P Tulsian of sptulsian.com says, “I think it is the non-promoter pledged shares that are coming to the markets.”

Earlier, there was news of Arshiya International laying off 200 employees, of which 90 were directly asked to leave the company. Also, there were allegations of accounting irregularities at the firm. Later, the company said the lay-offs were aimed at reducing costs; it denied the alleged financial irregularities. Despite providing clarifications on these issues to analysts and investors recently, there is still no respite for its shares. Analysts believe investors don’t have confidence on the company.

The company’s woes began when it took a huge loan to fund capital expenditure (for its facilities in Mumbai and Khurja) in the last three years. This is also why the value of assets (fixed and capital work in progress or the projects underway) rose to Rs 2,776 crore in FY12 from Rs 552 crore in FY10. The capital expenditure was funded through borrowings (debt of Rs 2,288 crore in FY12), resulting in a debt-to-equity ratio of 2.5 times in FY12. Delays in client payments also led to more working capital-based borrowing. In FY12, working capital days stood at about 105, compared with 42.9 in FY11. Higher borrowings and the poor industry environment added to the company’s woes. By the quarter ended September, shares pledged by the company’s promoters stood at 72 per cent.

There are constraints on the liquidity front as well---salaries of employees are being delayed by 1-1.5 months. The company would find it challenging to service the current debt and interest and meet its internal requirements, at least in the near term.

The company’s operating cash flow has already fallen from Rs 245.5 crore in FY11 to Rs 50 crore in FY12.

Arshiya International plans to address some of these issues by cutting costs, such as that on employees. It is also considering postponing some of its capital expenditure (on the second phase of the Khurja facility) till existing assets are utlised. The company’s promoters are also putting in more funds.

To meet the immediate liquidity hurdles, they are also trying to raise borrowing limits from banks. The company would also focus on reducing its working capital and ask debtors to hasten repayments. Though these initiatives are likely to help the company, their progress has to be monitored.