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Pledging Gamble Sours for these Companies

It's a double whammy for these companies where promoters have borrowed when both share prices and earnings start falling

Secured lending happens when the lender lends with collateral that is worth more than the value of loan extended. In case of businesses, promoters routinely borrow against their holdings for various reasons. The going is fine as long as the value of the pledged shares is more than the borrowing, however, when fortunes reverse, promoters tend to pledge more to make up for the margin of safety.

We examined companies in which promoters have heavily pledged their shares wherein their earnings too have been falling in the past three quarters. Such companies are treading with danger, because with consistent fall in earnings; the probability of fall in share price is high, leading to a spiralling effect resulting in a vicious circle that is difficult to come out of. We thus advice investors to stay away from such stocks, as these companies are wealth destructors, unless of course you do see clear turnaround signs.

Promoter pledges their share in the company with lenders for debts. The value of the shares should be more than the debt amount for margin of safety but if the share price of the company whose shares are pledged falls below a certain value then the promoter needs to pledged more number of shares or something of its equivalent.

Following are the companies in which the promoters have heavily pledged their shares and also have witnessed constant fall in their earnings in the last three quarters. This is a dangerous situation for these companies because with consistent fall in earnings probability is high that share prices will also fall and hence the promoters will need to pledged in more share with the lender. This pledging of more share is a not a good sign and hence further pushes down the stocks and in turn more pledging is required therefore this situation traps the company into a vicious circle wherein it is very difficult to come out of the same. We advice to stay away from such stocks because they are more prone to such wealth destruction and invest only if there is clear sign of fundamental turnaround.

Company NameMarket cap (₹cr)Promoter's Holding (%)Promoter's Shares Pledged (%)EPS (₹)
2Q previousprevious QLatest Q
Ashapura Minechem61548.969.85.63.31.4
BS157569.1650.40.20.1
Caprihans India617171.81.210.7
Cox & Kings349459.550.119.32.3-3.4
Era Infra Engineering38659.188.2-6.9-7.4-13.6
Essar Shipping43275100-0.5-4.2-8.1
Hindustan Dorr-Oliver10755.353.2-2.9-4.1-4.9
IL&FS Investment Managers84750.51000.60.60.5
Indian Terrain Fashions11739697.35.90.2
Ind-Swift Laboratories18152.692.2-2.2-3.5-15.8
Jyoti11932.797.4-15.9-17-28.9
Lok Housing & Cons.6542.854.90.10.1-0.2
Parenteral Drugs9273.369-5.3-6.6-20.9
Punjab Chemicals1134677.95.85.2-7.4
Ramky Infrastructure37867.857.1-12.6-23.3-30.7
Vardhman Polytex110551004.50.9-2.9
Videocon Industries537368.868.90.60.6-2