Kouton’s SOS to SBI Caps ” Calling Charlie ! Calling Charlie ! …we have been Outlawed !”…Destroyed from near Rs 400 to under Rs 30 ! in quicktime !

A 52 Week High of Rs 384 exactly a year ago on March 8,2010 and Rs 29 now ! near it’s low of Rs 25 on Feb 25,2011 on BSE…..KOUTONS RETAIL scrip with FV Rs 10  has simply been destroyed on the bourses inside a few months really…destroying its shareholders too

….it only has itself to blame….its high borrowings and low liquidity being bared naked with the revelation of  overstatement of Current Assets

That it faced serious liquidity problems was clearly evident when the Company announced FY 2009/10 Financial Results if you looked beyond the Roses at the Thorns…The Company netted a Profit of Rs 80 crs that notched a fabulous EPS of over Rs 26 on an Equity of Rs 30.55 crs of which 63.90 % was held by the Promoters Kohlis and Sawhneys…the bourses smelled this sweet rosy earning and reflected this in giving a 15 multiple to this garment retailer that sold brands like Charlie Outlaw

But what should have raised the antenna and sounded a warning were these two pronouncements

• Dividend Declaration was just 2% or 20 paise,despite earning over Rs 26 EPS…thats a neglible payout of less than 1 % !…ridiculous !…and company was simply ill advised here…Earning Rs 80 crs net and declaring to pay out just Rs 61 lakhs to shareholders as dividend !!!
• Auditors,R Chadha & Associates have actually given a clean report stating that the Accounts give a True and Fair View of the Business Net Assets,Earnings & Cash Flows…however read their report further snd they have made a passing mention that the company has defaulted in repaying bank loan instalments !

The Auditors negligence and oversight is bared when in the Q # December 31,2010 Results the Company has made an Extraordinary Expenditure of Rs 254 crs that is the key part of the overall loss of Rs 317 crs…This Extraordinary Expense has two constituents…Rs 103.86 crs write off of Debtors and Advances and Rs 150 crs as provision being made for Impairment of Inventories…an independent Evaluator will submit a final valution on Inventories by May 2011…so this figure may even go up some more !

This led me to examine the Assets and Liabilities of KOUTONS at March 31,2010…Relevant Extracts are as below

The Huge  Extraordinary Expenditure of Rs 254 crs booked in Q 3 FY 11 exposes the Auditors in that how did they accept the value at March 31,2010 of Current Assets,specifically Debtors,Loans and Advances and Inventories as shown in the Books without testing adequately for overstatement 

The Networth of Rs 505 crs at March 31,2010 would in all probability be wiped off at March 31,2011…or may be just about marginally positive….This would mean that the Book Value of Rs 165 would crash to below Rs 30 and even turn negative if more provision is made for Inventories,over the Rs 150 crs made

 The FY 2010 Accounts have been signed on September 4,2010 by the Chairman DPS Kohli…his Chairman’s Statement does not mention any risks and problems being faced although it does announce that the company plans to raise Rs 400 crs through Equity…the Company had already started defaulting to banks and other creditors….a month later these acute liquidity issues emerged from the Company’s Closets and the Share Price dived to levels of Rs 120….Amusingly a few Investors,even an FII,Sparrow India Diversified Opportunities Fund felt KOUTON was a good Investment after this sharp fall to Rs 120 levels…December 31,2010 Shareholding shows that Sparrow owned 2064896 shares that constitutes 6.76% of the Equity…it entered into a Bulk Deal on October 12,2010 on the NSE for 420000 shares at Rs 117.77…assuming its aggregate holding is around this price it would mean it has invested closed to Rs 25 crs in KOUTONS in the October -December 2010 Quarter….at current price of Rs 29 this investment has diminished sharply in value in just a few months to below Rs 6 crs !…an erosion of over 75% !

 Interestingly the Promoters stake too has dropped sharply to 32.9 % at December 31,2010 from 63.90 % at June 30,2010…probably due to part transfer to the lenders of  the near 100% of their holding that was pledged…with IFCI and others for a Hospitality Venture…as the Share Price fell they would have been under pressure to top up the borrowings….they have denied that they are exiting their company….instead they plan to release their pledged shares by paying off the borrowings by selling some of their privately held real estate…even their hospitality venture

SBI Caps has been appointed to advise on a debt recast….Board of Directors and Audit Committee has been reconstituted as Independent Directors and Top Management resigned 

KOUTONS is a prime example of how excessive financial leverage can become lethal and threaten survival when business experiences a huge downturn and Current Assets need significant write off or provisioning to reflect a lower true value

The Share Price has collapsed in a heap…leaving Shareholders stunned and distraught….You can say it’s been halving n the second half of FY 2011…initially from healthy near Rs 400 levels a year ago to Rs 200 and then down to Rs 100-Rs 120 in October and to Rs 55-60 levels by December 2010…From there it has halved again to current levels of below Rs 30….with possibility to halve yet gain to Rs 15 levels !…as it struggles for Oxygen…grappling with High Borrowings and now High Losses and Overstatement of Assets

To Koutons Credit it is cleaning up it’s books and trying to raise Capital to pay off Borrowings and revive…The Rs 90 crs Market Cap suggests that this Retail Player is available for a Bargain …a Steal really…just like the Distress Sales it announces for it’s Garments just to create some Liquidity….but any potential buyer will inherit High Borrowings and High Losses and probably a Negative Networth soon…..

Koutons was a ScripTease as it got destroyed on the Bourses…..would now put it as a ScripWatch…maybe a ScripSelect (albeit with high risk) if it manages to raise Equity Capital…it has announced it is raising the authorised Capital from Rs 36.30 crs to Rs 100 crs….needs a White Knight to bail it out….someone who can pump in Rs 200 to 400 crs in Equity….nearly 6.95 cr shares can be placed…at current Market Price of Rs 30 these would fetch Rs 200 + crs…at a premium it could raise in excess of Rs 300 crs……the next three to four months are crucial for KOUTONS

Will be keeping an eye on it……