Rolta shares, bonds spooked by Glaucus' 'strong sell' rating

Company denies contents of report, says exploring legal action

Shares and dollar-denominated bonds of Rolta India dropped sharply after Glaucus Research Group issued a ‘strong sell’ recommendation on the software developer’s corporate notes.

The US-based research firm initiated coverage on Delaware-issued 2018 and 2019 corporate bonds and set a price target of only $0.16 compared to prevailing price of $1.04 and $0.99 respectively mentioned in the report.

Rolta’s bonds due in 2019 dropped by an 11.8 points to $0.87 in Hong Kong, data provided by Bloomberg showed. Meanwhile, shares of Rolta plunged 12 per cent to end at Rs 153.9 on the domestic bourses.

The company in a statement called the contents of the Glaucus report “baseless, erroneous and mala fide.”

“This undated Glaucus Research Report is completely baseless and has factual errors and inconsistencies. The Glaucus Research Group has never contacted Rolta to verify any facts. This report is malifide, malicious and aimed at misleading investors with an ulterior motive— so that Glaucus Research Group can benefit from its short interest in Rolta’s bonds,” Rolta said in a press note.

Glaucus in its report said bondholders and ratings agencies “have fallen for the myth of Rolta” and thrashed rating agency Fitch’s view on the company’s bonds.

It further accused Rolta of fabricating its results.

“Based on the evidence and analysis presented in this report, we believe that Rolta has fabricated its reported capital expenditures in order to mask that it has materially overstated its Ebitda (earnings before interest, taxes, depreciation and amortisation). The margin for error is narrowing: Rolta’s net debt has risen from $319 million at FYE 2011 to $740 mn in Q3 2015 and the company has almost nothing to show for its highly suspicious spending,” said Glaucus in its 32-page report.

Mumbai-based Rolta, with operations in India and North America, said it is exploring all avenues, including legal remedies to protect its interests.

This is not the first time an Indian company has got hit by a scathing report issued by a foreign research firm. In the past, Indian companies belonging to the Reliance and Indiabulls group have been targeted by Canadian firm Veritas.

Following a recent rule change, foreign research firms are not allowed to distribute research on Indian securities except through a Securities and Exchange Board of India (Sebi)-registered entity.

In this case, however, Glaucus has issued recommendations on Rolta’s bonds issued in the US and not its local shares, and therefore may not come under Sebi jurisdiction, say experts.

This is not the first time Glaucus has issued harsh views and recommendations on an Asian firm.

According to a Reuters report, Glaucus had ‘strong sell’ rating on Taiwan’s Asia Plastic in April 2014, saying its financial reports were inflated. In 2013, shares of Chinese child skincare products producer Prince Frog International had dropped in Hong Kong trading after Glaucus took issue with the company’s sales figures. Also, Singapore-listed Chinese company Minzhong Food Corp, too, came under fire in 2013 when Glaucus alleged the company misled investors about sales, the Reuters report said.

STUNG BY GLAUCUS

• California-based research firm has issued ‘strong sell’ on Rolta’s bonds
   
• It said the software developer has fabricated accounts
   
• Rolta shares and bonds plunged
   
• Rolta denied content of the report, termed it mala fide
   
• Rolta is mulling legal action
   
• Glaucus has issued scathing reports on other Asian firms in the past