By now the sequence of events is clear:
I may sound rude when I say that investors in Bhushan Steel deserved to lose their money. But, I have reasons to state it with such confidence. Neeraj Singal, Vice Chairman and MD of Bhushan Steel, bribed S K Jain, CMD, Syndicate Bank by ₹50 lakh, for the bank to extend his company a loan, which otherwise they did not qualify for. Singhal bribed the banker so as not to default on the existing loans his company had. Instead of going for capital restructuring, Singhal tried to cover the situations by taking more loans, something that he might have done in the past as well. The net result: investors in the stock have lost more than 50 per cent of their wealth in past few days.
Coming back to my lofty statement on why those who lost money in Bhushan Steel deserved to lose it; it was all obvious if one had checked the fundamentals. In fact, if one looks into the annual reports available till FY2013; it had all the necessary ingredients to stay away from investing in the stock. Here are the five ominous signs that investors and several analysts missed.
1. High debt to equity ratio. The debt rose year on year to a staggering level crossing the rise in its net worth to touch a debt to equity of 3, which is high.
|Net Worth (Rs cr)||9125||7487||5840||3959|
|Total Debt (Rs cr)||26897||19817||16561||11404|
|Debt to equity||2.95||2.65||2.84||2.88|
2. Rise in Debtors to revenue ratio. Debtors rose sharply to 22 per cent of the revenues in FY-13 from 7 per cent in FY-11. Rising debtors indicate company is selling more on credit and not realising cash thus inflating the revenues.
|Revenue (Rs cr)||10744||9961||7004||5632|
|Debtors (Rs cr)||2343||1220||490||751|
|Debtors as per cent of revenues||21.81||12.25||7||13.34|
3. Invariable cash from operations. EBITDA or operating profit is considered as a good proxy for cash from operations but there was no relation between the growth of EBITDA and cash flow from operating activity and was in fact negative in FY-13.
|Operating profit (Rs cr)||3328||3021||2101||1570|
|Cash from operations (Rs cr)||-211||2739||994||417|
4. Strain on working capital. All three efficiency ratios receivable days, inventory days and payable days took poorer shape year on year. Receivable days means how many days company take to realise cash from its debtors and rising trend is definitely not a good sign. Inventory days tells us time taken to convert the product from raw material into the cash and that too rose to high. Payable days means how much time you get to pay to you suppliers for purchases and more time gives you relaxation but it also declined. These three ratio together indicates how the company face a sudden rise in working capital requirements.
5. Decline in profitability. Profitability declined constantly. Not only margins but return on equity and capital too fell year on year. When return on capital falls below the cost of capital (Equity plus debt) then it becomes difficult for the company to survive for long.