Why shareholders of Gayatri Projects lose Rs 3,040 crore?

Gayatri Projects has been one of the massive wealth destructor for its shareholders in the last one year, as its share price has plunged nearly 87 per cent from its 52-week high. The market cap of the company has eroded from the top of Rs 3,510 crore to ~Rs 474 crore today.

The primary reason behind such wealth destruction is the company's poor financial performance that has led to a default in its debts.

As on December 2019-ended quarter, Gayatri Projects has failed to pay the debt repayment of Rs 82.66 crore. Furthermore, in this year, till today, the company has made a default debt repayment of another Rs 11.73 crore.

How the investors could have avoided this massive wealth destruction?!

While looking for a better investment opportunity, one of the checklists should be checking-related party transactions and auditor's report. If an investor had gone through these checklists then, he would have easily avoided this wealth destruction.

The company has a large related-party transaction, which always remain a big concern and is also a key red flag. As on FY19, the company has given a loan of Rs 130.9 crore to its subsidiary and of Rs 10.25 crore to its associate that falls under related-party transactions.

In terms of contingent liabilities, the company has given a corporate guarantee to its subsidiary, associate and also to the companies where key managerial personal have an interest, totalling to nearly Rs 2,738 crore, which is clearly a big cause of concern. This may be a common practice, where the parent company issues a corporate guarantee for its subsidiary or associate. However, according to auditor's report, the company has given an irrevocable and unconditional corporate guarantee to a subsidiary of associate company that has defaulted in the repayment of dues to the lenders, which raise a big question on corporate governance on the part of the company.

Further, the auditors' report states that inter-corporate loan grouped under 'non-current loans' and accumulated interest thereon, is pending for recovery.

Apart from these, to avail credit facilities, the company's promoters have pledged nearly 100 per cent of their stake, which is another red flag to invest in the company.

Therefore, this wealth destruction suffered by investors was completely avoidable, if an investor had tick-marked on the common checklist before investing in the shares of any company.