Shree Global Tradefin
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We are not sure how many of you have heard of Shree Global Tradefin, which has an employee strength of a mere 11! However, this is a company whose market cap stands at a whopping Rs 4884 crore (as of March 18, 2011), outshining some of the veterans like Britannia, which has a market cap of Rs 4280 crore, or MRF, whose market cap stands at Rs 2822 crore, or even Bata at Rs 2231 crore. As a matter of fact, one can buy out 100 per cent equity of Dena Bank and South Indian Bank with the market cap of Shree Global Tradefin.
What comes as a big surprise to us is that this non-dividend-paying company enjoys a price earnings ratio of 1617 times! This is ridiculous for a company of this size. What is even more astounding, is that this company scores very poorly on the corporate governance front. We did a detailed analysis of the company and realised that there is a mystery behind it. Our four-page detailed questionnaire, hand-delivered to Managing Director Sanat Joshi at the company’s registered office and also e-mailed to company's official e-mail address, had not elicited a response from the company even until the time of going to press. This is a classic case for the SEBI, Ministry of Corporate Affairs and Bombay Stock Exchange, on which this scrip is listed, to conduct an investigation, since a company like this could result in substantial losses to retail investors.
Corporate Governance: A Big Issue
The company’s annual report does not give even the basic information that helps investors to understand its operations or financial health. Let us start with basic disclosures. It has investments to the tune of Rs 340 crore in its books of accounts as of March 2010. But the company just stops at this. It does not elaborate upon how much of the same are trade investments, how much is equity, how much are mutual fund units and so on. Worse still, it does not even give a bifurcation of investments in listed and non-listed securities. Furthermore, its notes to the account do not reveal what the market value of the investments is as on the balance-sheet date. This information is mandatory under the Companies Act and, therefore, we feel that it is a lapse not only on the part of the company, but also on that of the auditor, M V Krishna Moorthy who has signed the balance-sheet.
The story does not end here. What comes as a shock to us is that loans and advances taken by the company and shown as outstanding in the balance-sheet of 2009 to the tune of Rs 199.48 crore vanished from the balance-sheet of 2010. One would assume that the company repaid the same, but the same is not reflected in the cash flow statement for the period ending March 2010. Any annual report gives two years’ numbers -- that is, for the year that has just gone by and the year before that -- so that investors can make sense of the numbers in a better manner. Look at Exhibit 1(on the next page) wherein the previous year’s figures of unsecured loans are not to be seen. In fact, that heading itself is missing. Similarly, unsecured loans normally carry interest charges, but the company just paid Rs 6,000 (we repeat, rupees six thousand only) as interest for the year ending March 2010 and paid no interest charges for the year ending March 2009. As one can see from Exhibit 1, unsecured loans are there in the books for more than one year. We are not sure who could offer such huge loans to a company of this size and that too almost without any interest.
But there is more to corporate governance. The company received Rs 541.95 crore as preference share application money for the year ending March 2010. What comes as a surprise is that approval for the same came much later and in two tranches -- one in the month of May 2010 and another in July 2010. Who are the people who subscribed to such a huge capital? What are the terms of redemption of these preference shares, coupon rate and so on? Why does the company need such a huge amount of money? Is it hard cash coming in or just a book entry?[PAGE BREAK]
What makes the story even more mysterious is that Shree Global Tradefin makes an open offer along with one company called Trump Investments to the shareholders of Lloyds Steel Industries at a price of Rs 13.95 per share. The open offer was triggered as the company converted 13.80 crore warrants issued by Lloyds Steel into equity shares. The fine print of the open offer suggests that Shree Global is a part of Lloyds Steel Industries. Shree Global holds 39.94 per cent stake in Trump Investments. The latter had no income for the past three years ending March 2010 and its net worth for the year ending March 2010 stood at Rs 11.38 lakh. We do not have in our possession the annual report of Trump Investments’ and, as such, it is not possible to comment on the financial health of the company, but one can draw an inference from the above numbers. Besides, how Trump Investments could finance such huge investments in Lloyds Steel is not known. The open offer of Lloyds Steel, which was supposed to close in December 2010, has been extended and would now close in March 2011. Since the open offer is still on at the time of writing this analysis, we are not aware of the kind of response Shree Global and Trump Investments received from the public.
Another area of concern is that the company has not disclosed its nature of business in the annual report which could throw light on what the company actually does. We reproduce the sentence from the annual report for the benefit of our readers, “the company is engaged in the trading activity primarily having vast potential and now getting attention of the organized sector”. But by connecting dots in the annual report we found that it is in the trading business of Iron and steel. But it seems that the company has changed its nature of business in the current year as the open offer advertisement of Lloyds Steel published in the newspapers claims that the company is in the business of trading of steel products and trading in shares, debentures and other securities. We are not sure whether the company has informed its investors about change in nature of business.
Financials: Nothing Great to Talk About
Our review of the past three years’ financials of the company suggested that these are weak. The company could manage to report a net profit of Rs 1.23 crore last year, ending March 2010, but before that profits were in a few lakh of rupees. For the year ending March 2009 it reported a net profit of Rs 8 lakh and of Rs 4 lakh the year before that.
Since it is a trading company, there is no way it can command such a high premium on the bourses. Furthermore, looking at the other income, we assume that its investments are not giving any dividend or interest income, which stood at a mere Rs 1.20 crore for the year ending March 2010.
On investments of Rs 340 crore the yields are less than half a per cent! We are not in a position to comment on what the actual worth is of the Rs 340 crore in investments, since the company did not respond to our questionnaire.[PAGE BREAK]
Valuations: Another Mystery
We are not sure why the market is giving such a huge premium to a company whose disclosures have not been made properly. Normally the market punishes a company found lacking on the corporate governance front. There seems to be more than meets the eye. We strongly advise our readers to tread with caution on this counter as information to make investment decisions is missing. Despite having a huge market cap the company has no institutional investors and the worst part is that there are only 2952 shareholders. Looking at the last four quarters’ shareholding patterns, neither the promoter nor the investors holding more than one per cent stake has seen a change in the shareholding pattern. These two categories account for 98.69 per cent of the total equity capital. In other words, price discovery is taking place on just 1.31 per cent of the stocks. Also the promoters’ holding until September 2010 was in physical form, but the same is now being converted into demat form.
We urge the SEBI and Bombay Stock Exchange to direct the company to make more disclosures, so that price discovery of the company can take place in a fair manner. We also request the Ministry of Corporate Affairs to look at its financial dealings and to see whether or not the company flouted any of the corporate laws.