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Debt restructuring approval gives an exit opportunity to investors

Share prices of such companies usually rise when CDR cell recasts loans

Tinesh Bhasin Mumbai
Last Updated : Apr 02 2015 | 1:43 PM IST
Recently, when Pipavav Defence and Offshore Engineering announced that the board has approved a debt restructuring package, the company’s stock started rising. The news came in after market hours on March 31. The next day share price went up 5.59 per cent to Rs 60.45 during intra day trade.

Similarly, positive movement in stock prices were seen when other companies received approval for corporate debt restructuring (CDR). These include companies such as Hanung Toys & Textiles, Shriram EPC and Gammon India.

“The stock prices jump as these companies are previously punished for excessive debt and hence they underperform the market,” said Daljeet  Kohli, Head of Research at IndiaNivesh Securities. But also adds that this does not mean that investors should rush to invest in such stocks.

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He explains that the firms resort to CDR when their books are heavily laded with debt and they could be defaulting on loan repayments. Most of these companies are not well managed and that’s the reason why they are in bad shape.

Nirmal Gangwal of Brescon Corporate Advisors, who has helped many Indian companies restructure debt and executed transactions aggregating to over $7 billion in the last 10 years, explains that in a typical debt restructuring plan the company asks lenders to give them a moratorium period for repayment and the interest rates are eased. In some cases, even fresh money (new working capital) is infused in the company.

“Though the perception is that such companies are badly managed, and in some cases its true, there are firms which have a good business potential but could not repay debt as external factors affected their margins,” said Gangwal. He adds that the last five years have not been good for global as well as Indian economy where many companies have seen their margins erode impacting their profitability.

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Stock market experts say that it’s always better to stay away from the companies that are heavily into debt. News of debt restructuring means that a company has got a life line but investors should avoid taking fresh bets on it though there could be positive movement in the stock prices. Existing investors, on the other hand, should use this opportunity to exit the stock and cut their losses.

Parag Parikh, a well-known investor, says that before investing a person should first look at the reason for debt piling. “Investor should evaluate whether the promoters took loans for business expansion or to buy planes and swanky offices. They should check the salaries of top management and see if they continued to enrich themselves despite the company was in doldrums,” said Parikh. Investing in such companies require a thorough research and should invest only if you are convinced of the management and future of the firm.

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First Published: Apr 02 2015 | 1:27 PM IST

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