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Wednesday, March 02, 2011

Margin Call on Promoters!! Buy SKM Egg

SKM Egg:
CMP: 10.60
Market Cap: 27.67Cr
Sales TTM (Twelve tariling Months): 162.73Cr
Gross Profit TTM: 3.02Cr 
Net Profit: -ve 11.82Cr
Interest Payment TTM: 7.26Cr
Depreciation TTM: 7.56Cr

I had read an interesting article in economic times (Titled:  Margin call - a dreaded term in the market) about how promoters are being taken for a ride. Here is the complete article from economic times
Scavengers on the Street are fishing for a little piece of information. Something that may appear innocuous, but isn't. Unsuspecting individuals who share it may not anticipate the havoc it can cause. Till the stock market opens the next day. A slice of the information can be accessed from the Internet. The more damaging part is with someone else. The scavenger's job is buying that 'someone' a drink. It's about pledged shares. Not the number of shares that promoters of mid-cap companies have pledged with loan sharks to raise money. That information is in public domain. But what isn't is the price at which a lender pulls the trigger. A short seller who comes to know that price hits the goldmine.
If the stock that's pledged slips below this price or even touches it, the lender will ask the borrower to either pledge more shares or bring in cash. It's called margin call — a dreaded term in the market. If the borrower can't, the lender dumps the stock. An unnerving sequence of events may follow: as the stock falls further, the lender asks for more margin, and as the borrower fails, there's more selling. Indeed, a scavenger who knows the price at which the margin call will take place is the master of the situation.

Once he fishes out that information, he plans for the kill. Before that, some homework has to be done. He must be sure that the promoter who has borrowed doesn't have spare cash or shares to cough up. If he figures out that the borrower is stretched to the limit, he starts going short on the stock. If the price drops to a point where it's at a striking distance to the price at which the margin call will be triggered, he shorts again for the one last time. A small push, before a free fall.

If the lender is a high-street bank and the borrower a big name who has been a client for years, the outcome can be less brutal. But when the borrower is a mid-cap dream-seller and the lender a new-generation finance company or a brokerage arm, there is unlikely to be a prolonged parlay. The scavengers know it all too well.

What has come to their advantage is the comparatively easy access to the 'price info'. Their analysts can chat up with company officials to find out the name of financiers, and others can follow it up with lenders to 'get a sense', as they say, about the price, or at least the range at which margins can be called. In several cases, such queries could even pass as academic interest — a ploy that bond houses once used in a different way. Treasury economists in Mumbai bond desks called up their counterparts in the labour ministry to have a serious conversation about the 'inflation scenario'. Such chats, on a Wednesday evening, inevitably ended with the latter disclosing the inflation number that will be announced on Friday morning. On Thursday, bond traders knew how to use the information. Those were the days when the stock market never cared about weekly inflation numbers. And the world outside Nariman Point was clueless about bonds. It was a neat arrangement that went on for years till too many people started trying it out.

The scavengers in the equity market are still a small group. They prey on small companies backed by cash-starved promoters. Shaky fundamentals about the stock and a bad press on the company do not govern their action, even though such things make their job easier. They are unlikely to touch stocks where the promoter is not leveraged, even if there are enough fundamental reasons to short the counters.

Some of these scavengers had cut a very different deal with company promoters in the heady days of 2007 when every penny stock was up for grabs. That was a time when friendly promoters used them to rig up stock prices before shares can be dumped on foolish late-comers. Today, the promoters are at the mercy of the same people — their one-time partners in crime. In the quicksands of the market, the balance of power has shifted. In an unforgiving Dalal Street, what goes around comes around.
Here is the link to the original Economic Times Article (Link)
A more important question is.. can we identify these stocks and take advantage of the situation?.
we do have one stock in our back yard which seems to face this problem (SKM Egg)
Promoter pledged shares in March 2009: 7,899,000 
Total shares held by promoters in March 2009: 14,028,893
% of shares pledged: 56.30%
Promoter pledged shares in Dec 2010: 11,242,492
Total shares held by promoters in Dec 2010: 11,744,513
% of shares pledged: 95.7% << Alarm Bells!!
Let us look at SKM Debt levels:
 Long term Debt to Equity ratio is: 0.79 for year ending March 2010
Short term Debt/Equity ratio is: 1.49 for year ending March 2010

Lets look at interest payments:
Interest PaymentsYear ending March 2010: 8.12Cr
Interest payments for past 9 months: 6.33Cr
so certainly SKM has kept the interest payments in control.

The stock definitely seems to have been hit by scavengers as we can see the promoter pledged shares are more than 95% and any further drop could coincidently trigger a fire sale by the lender.. kicking the promoters out and put the "scavengers" in the driver seat.

Well what's in there for us?. I would say.. a really low price to get in cheap into SKM Egg as the scavengers try to push the stock down.. 52 Week low is: 9.15 on BSE Feb 11,2011 current market cap of: 27.67Cr for the largest exporter of "Egg Powder" from India .. is Cheap Real Cheap.. 
In the past history of 13 years the Avg "Cash Flow from Operations" for SKM egg is +ve 2.77Cr

Conclusion: This is crunch time.. but its actually an opportunity to get in real cheap into SKM Egg. Company is fundamentally sound and we can expect the company to do well in the future.. Scavengers are on the prowl giving us an opportunity to get in cheap. The stock last fell below 10 bucks in July 30,2004. which means even during the carnage of 2008-9 SKM did not touch 10 bucks.. Current stock price is a great buy price

Shareholding with pledged share data of promoters March 2009 and Dec 2010

SKM Egg share price drop below 10 on July 30,2004

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