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[Case Study] How A Dishonest Management Can Destroy Good Business?
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Case Study 2: P C Jewellers:
Contents
Formed by Padam Chand Gupta (Hence name PC Jewellers) in 2005, company is second largest listed jewellery manufacturer in India.
Company has seen great growth in a short span of time. While Revenues increased by 12.28% CAGR in the past 5 years, from Rs. 5372 crores in 2014 to Rs. 9584.46 crores in 2018. Profits were growing as well at 9.75% CAGR from Rs. 356.31 Crores in 2014 to Rs. 567.04 crores.
Image Source: Moneycontrol
PC Jewellers has a strong Promoter holding of 57% with institutional holding about 22% of shares.
Company was listed in 2012, at a price band of Rs.125 per share to Rs.135 per share. The stock started gaining momentum after 2015, and touched an all time high of Rs. 600 per shares on 30 Jan 2018.
On 6th July 2017, company also issued bonus shares of 1:1, cheering investors.
Image Source: Moneycontrol
With strong financial performance, and strong promoter holding, everything in the company looked fine.
What caused the disaster?
The Decline (or should I say demise)? Of P C Jewellers was caused by a series of lapses over a period of six months. From Stake sale by Vakrangee, to Promoter gifting a part of their holding to an “undisclosed relative”, and also the announcement and withdrawal of share buyback lead to the state in which PC Jewellers is today. Let us understand each of the one by one:
The Vakrangee Issue:
It all started in 25 January 2018, an IT firm Vakrangee (our third candidate for case study), bought 20 lakh shares of P C Jewellers worth Rs.112 crores on 25 January 2018. This raised questions as to why an IT firm would buy such significant stake in Jewellery maker? A clarification from management of PCJ stated that none of its promoters have sold stake in the company and that the fundamentals of the company are intact.
On January 30th 2018, Vakrangee, issued new treasury guidelines for its company in which direct equity stake in any company was prohibited.
Following the new treasury guidelines, company had to offload a significant stake in PCJ causing panic selling.
There was a speculation that the management of PCJ has held back its business relationship with Vakrangee, an e-governance company already under SEBI scanner for alleged price manipulation of its own shares.
Promoter Gifting stake to relative:
Company’s Promoter Padam Chand Gupta gifted 2% of his stake in the company to an unknown relative. Investors feared, that promoter are reducing their stake in the company using this route and more such deals may take place in the future as well, leading to panic selling.
While seeking clarity on why the stock price was falling, management was unable to give a reason and said that company has strong fundamentals and there is no apparent reason for such decline in price.
In order to curtail the free fall in the market, P C Jewellers came up with a buyback announcement in its board meeting on May 10th 2018. PC Jewellers was willing to buy shares worth Rs. 4245 Crores.
Company needed an NOC (No Objection Certificate) from its bankers to proceed with the buyback.
The bankers of the company refused to give NOC. In the absence of requisite NOC, company had to withdraw the buyback, leading to further decline in stocks.
The Stock price of PC Jewellers was worst hit when Vakrangee started off loading stocks of PCJ in large quantities as per new treasury guidelines.
Investors and analysts believe that management of Vakrangee and PCJ were somewhere involved in price manipulation.
The promoter’s secret gift of shares to an unknown relative sparked further speculation in the stock, and the management lost its credibility significantly. Finally, the U-turn in share buybacks was the final nail in the coffin for the company.
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