Tuesday, March 23, 2010

When will this end?

I am talking about the fall in prices of shares of Cranes Software. Here is the chart for the last three years:

The company's share price touched an all time high of INR 174 in December 2007, at the peak of the then ongoing bull market. The last closing price on 22 March 2010 was INR 16.9, a correction of more than 90% from top. The share price was trading around INR 35 in March 2009 when the Sensex bottomed. Thus it has lost 50% more after the Sensex bottomed.

The company's total market capitalization has fallen from a high of more than INR 2000 Crore to less than INR 200 Crore. Company's total debt expanded very rapidly during the last five years, from around INR 115.56 Crore at the end of March 2005 to INR 743.25 Crore at the end of March 2009. The yearly interest outgo of the company in FY2005 was INR 11.91 Crore. The company paid INR 14.97 Crore as interest in the latest quarter of December 2009. Consolidated numbers look as ugly as the standalone ones. At the end of March 2009, the company's net current assets were INR 715.99 Crore. If the debt of INR 743.25 Crore is to be paid from the net current assets, there is nothing left for the equity holder except the investments worth INR 80.13 Crore and Net Block of INR 309.86 Crore.

The latest shareholding pattern shows that the promoters have already pledged more than 87.5% of their shares. As the share price is going down, either they will have to pledge more shares or the shares will be offloaded in the open market by the institute which has taken them as collateral for loan. The block deals show that many FIIs, including Macquarie, Deutsche Securities and Swiss Finance Corporation, started exiting at INR 30. The example shows how liquidity problems weigh on valuation of companies in stock market.

The correct attitude of the security analyst toward the stock market might well be that of a man toward his wife. He shouldn't pay too much attention to what the lady says, but he can't afford to ignore it entirely. - Benjamin Graham
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