Porinju Veliyath, managing director and portfolio manager, Equity Intelligence India, in a letter to investors last week said that he made a mistake by investing in LEEL Electricals Ltd (formerly Lloyd Electric & Engineering).The stock lost more than 80 percent of value since 2018 till date. The stock fell from Rs 287.60 recorded on December 29, 2017 to Rs 47.65 on 11 January 2019.
According to September shareholding data, EQ India Fund & PMS clients of Equity Intelligence India Pvt Ltd held 8.38 percent stake. The firm held 7.9 percent stake in the quarter ended June.Moneycontrol has reviewed a copy of the letter.In a rare admission, the Kochi-based investor, in a letter to investors said: "Our investment in LEEL has witnessed a significant capital erosion and I admit that in hindsight it looks a mistake. My assumption that siphoning off in a changing regulatory environment would be difficult appears faulty."
"LEEL share price is nearly 80 percent low from the cost in most of the accounts. While we cannot rule out a possibility of eventual recovery in the share price, the damage has already been done. Rare but costly misjudgments like LEEL resulting in permanent loss of capital are humbling and thought-provoking for us in our pursuit to create wealth for our investors through long term value investing," he said.
However, he further added that "such flawed investments though big enough to be a drag on our investment journey, I am confident, would not deter us from creating wealth going forward.
5 reasons for investing in LEEL as highlighted in the letter:
• The company had received Rs 1,550 crore cash from the sale of Consumer Durable (CD) division to Havells and was trading at Rs 1,000 crore market cap (Now Rs 200 crore).
• The company had a good long-term operating track record in air conditioning and white goods space, having successfully created and divested the "Lloyd" brand of appliances.
• The company had just sold the brand "Lloyd" along with associated intangible assets and had retained the operating assets including 8 manufacturing facilities in India and abroad and was set to continue its business of being an OEM supplier to other major manufacturers.
• Post demonetisation and implementation of the Goods and Services Tax (GST), corporate governance standards, law enforcement and business culture in India was improving and it was getting tougher to siphon off from public listed companies. Also subsequent to the Companies Act 2013, and various SEBI initiatives, the minority shareholder rights were getting stronger. Under these circumstances, the likelihood of LEEL promoters siphoning off the cash received from the sale of CD division was low.
• Given the opportunities that the space in which LEEL operates and being cash rich, the most logical path for the promoters who have been in the business for around three decades, would have been to take the company to higher orbits and thereby creating wealth for all the stakeholders involved.
What really happened?
Porinju in the letter said that his firm had accumulated nearly 5.4 percent of the company by October 2017. The company reported Rs 946.43 crore profit from the sale of CD division in Q218 results in November 2017, in line with the investment thesis.
Strong Quarterly Results:
Q318 results published in February 2018 also confirmed the same Rs 946.43 crore profit figure and we continued to buy LEEL. By end of February 2018, we held nearly 8 percent of the company’s equity.
Management change with the demise of promoter:
Meanwhile, in December 2017, the promoter of the company Brij Raj Punj passed away and his son, Bharat Punj took over the reins of the company.
Throughout our interactions with Bharat Punj and other senior management in various occasions, they sounded optimistic about the business and future of the company, in line with our investment rationale.
Company wrote back the profit from the sale of CD division:
On May 30, 2018, to the shock of minority shareholders, the company arbitrarily wrote back the profit from the sale of CD division in FY18 annual results to Rs 663 crore, triggering a selloff in the stock.
Diversion of funds to promoters:
The company also diverted nearly Rs 340 crore to promoter entities including the listed debt-laden entity Fedders Electric Ltd. as capex and loans for buying land and factories of their own plants. The stock fell from Rs 215 to Rs 127 in five days and the liquidity in the counter dried up.
Exploring legal remedies:
A complaint was filed with the Securities and Exchange Board of India (SEBI), seeking a forensic audit of books of accounts of LEEL Electricals, without which the suspected fraudulent actions of the promoters and senior management to siphon off company’s wealth for personal enrichment cannot be proven legally.
Management exits -- a cause of concern:
In the two months after a complaint was filed with SEBI, there has been several high levels exits from the company including many from senior management like the group CFO, Company Secretary, and VP Finance, Operations Director etc.
Fall in value:
Value of LEEL, in most of the accounts, have fallen below 3 percent of the account NAV. Attempting to liquidate the investment at a time without liquidity in the counter will only lower the realisable value and this would not make any material positive impact to NAVs.
First Published on Jan 13, 2019 08:19 am moneycontrolnews.
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