`Business Loans’ to prop up promoter-company stock?  

In less than fourteen months BSE’s SME platform has seen three IPOs from the GCM stable controlled by Baids. In fact, GCM Capital Advisors Ltd (GCAL) is the fourth company from the same promoters to tab the market. The working of GCM group companies and the contrarian market performances of the group stocks raise serious doubts about the credibility of the promoters. However, the irony is, promoters’ credentials do not seem to matter for our market regulators, mainly the country’s oldest stock exchange.

Take the case of GCAL’s promoter, GCM Securities Ltd (GSL). This company proposed to have an equity base of Rs 19 cr and collected a share premium of over Rs 6 cr when its operating income was just Rs 36 lakh! Only with the help of Rs 37 lakh `other income’ GSL posted a net profit of Rs 22 lakh for fiscal 2012. The company went public in the second half of March 2013 and claimed to have netted a profit of Rs 2.74 cr in the first six months of fiscal 2013, revenue being Rs 3.93 cr.  

Come post-issue, GSL’s profit nose-dived to less than Rs 18 lakh for the full year! What’s more, the first half revenue of Rs 3.93 cr was reduced to less than Rs 1.3 cr for the full year! Disappearance of profit in the second half is not uncommon. But, how did revenue become negative in the second half?  Further, first half of fiscal 2014 saw the bottom line crashing to less than Rs 20 lakh from Rs 2.74 cr in the corresponding period of previous year resulting in an EPS of just 10 paise. Yet, the share price has ballooned up to Rs 520! In other words for a company whose profit is not even Rs 1 cr, that too after 18 years if existence, market cap is put at Rs 987 cr! Who is interested in GSL’s shares at such exorbitant price when the company is yet to see a decent bottom line? Obviously, someone one is playing up the price. Why BSE has not bothered to look in to the price manipulation?   

Whereas GSL is quoting at a premium of 2500% over its offer price (Rs 20), another IPO from the same stable, GCM Commodity & Derivatives Ltd (GCDL), offered at the same price of Rs 20, is currently quoting at 51% discount. Even as GSL and GCDL have failed to put up a credible performance after raising more than Rs 19 cr, the promoters are now floating public GCAL to raise Rs 9 cr. Interestingly the core individual promoters propose to hold a negligible 0.12% while public companies GSL will be holding the substantial part of the promoter’s stake (36%) and GCDL staking in 3%.

Post-issue, GCAL will have an equity capital of around Rs 17 cr. How will they service such a large equity? As on February 28, 2014 GCAL had a net worth of more than Rs 25 cr. But, its gross revenue amounted to only Rs 1.28 cr on which it netted Rs 48 lakh. For a share whose EPS is not even 50 paise, the company is asking for a price of Rs 20. How can one justify a market cap of Rs 34 cr against a bottom line worth half a crore?   

GCAL’s financials are indeed frightening. While the company’s top line is worth only Rs 1.3 cr, its `trade receivables’ amounted to Rs 7.8 cr from group company, GCDL, which is a commodity broker of the scam-tainted NSEL. GCAL has given as much as Rs 19 cr to undisclosed recipients as “short term business loans” whose terms and conditions are not disclosed in the offer document. When more than Rs 26 cr is locked in unyielding assets, how they would service the public investor is anybody’s guess.

The abysmally low core (individual) promoters’ stake of just 20000 shares (0.12%) in a capital of Rs 16.94 cr and using the public companies’ funds to hold nearly 39% reflects poorly on the commitment of the promoters. Also when private placements to public are banned in the country, GCAL has roped in 634 individuals and 105 HUFs to stake in 47% of the pre-IPO equity at a premium of Rs 6 cr.

The GCM group is notorious for violating norms and attracting penalties. They inflate profits before the IPO and report losses after raising money. Public company parks funds under the guise of loans or investments into private ‘khokha’ companies which in turn play up the share price of the public company. They have many companies operating in related line of businesses.

Group’s flagship GCML increased its capital to Rs 23.70 cr by 2010 but the top line was worth only Rs 1.35 cr on which it netted Rs 27 lakh yielding an EPS of just Rs 11 paise. Surprisingly, in next fiscal, capital was increased by Rs 1.2 cr at a hefty premium of Rs 12 cr. The company’s revenue leapt ten times to Rs 13.4 cr in that year but, net profit amounted to only Rs 70 lakh yielding a negligible EPS of 3 paise. In fiscal 2012, revenue increased by Rs 6 cr to Rs 19 cr and profit moved up from Rs 28 lakh to Rs 98 lakh netting an EPS of 4 paise. For fiscal 2013, on a top line of Rs 19.97 cr, the company posted a profit of Rs 33 lakh. In fact for the quarter ended March 2013, it reported Rs 1.98 cr loss.

The behaviour of GCM group scrips mainly GCML and GSL deserves a thorough investigation. The Rs 10 share of GCML was quoting as low as Re 1 in 2004. For years the scrip was languishing far below par. Suddenly in 2010, it hit a century which was followed by a 10:1 split! In 2012, it crossed Rs 20 (equivalent to Rs 200 pre-split). This was followed by the consolidation 1:10 which took the price further up to Rs 273! However, within a month the price crashed to Rs 145. Last year at the time GSL’s public issue it was quoting above Rs 130. But today, it is available at less than Rs 50 while GSL has zoomed from Rs 20 to Rs 520!     

At the time of going public GCML’s promoters promised to hold more than 43% against which they hold just 5% today.  How do they control GCML with such a low stake? Interestingly, as many as 310 unknown private companies classified under the ‘public category’ are collectively holding about 32% of GCML’s equity.

The shares GCML were suspended from October 2005 and trading recommenced only in July 2007. GCML changed its name to Global Capital Market & Infrastructure Ltd in June 2010 though even after four years, the company has no link with Infrastructure industry!  Interestingly, BSE itself has refused to accept the company’s new name and still continues to display the old name.

OFFER AT A GLANCE
Issuer Name	GCM Capital Advisors Ltd
Offer Amount	Rs 9 cr
Offer Quantity	45 lakh shares of Rs 10 each
Offer % on Total Equity	26.6
Post-issue Free Float  %	61.0
Individual Promoter-stake %	0.5
Post-IPO Capital (Cr)	16.94
Offer Price	Rs 20
Application Quantity	6,000 & Multiples of 6,000
Offer Opens	May 5, 2014
Offer Closes	May 7, 2013
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Inventure Merchant Banker
Market Maker	Bindal Equities
Registrar	S.K. Infosolutions