In a meeting that was held on 10 May and lasted one hour ten minutes, the board of PC Jeweller Ltd. approved a buyback of shares that would cost the company Rs 424 crore. A postal ballot notice was issued to shareholders which said the voting would close at 5 pm on 13 July with the vote outcome to be announced on 14 July, on or before 5 pm.
Instead, on last Friday, 13 July, at 7:28 pm, the jewellery retailer informed stock exchanges in a terse two-line statement that its board had withdrawn the buyback proposal. The reason – non-receipt of a No Objection Certificate from its bankers.
A more elaborate explanation was made available on the next day.
The Bankers appreciated the fact that the Company is keeping its commitment of reducing its interest cost as well as bank exposure made at the time of declaration of annual results. However, they recommended that for the current year the Company should continue to focus on growth and give priority to further reduce its interest expense to the maximum extent possible. Accordingly, they did not approve the proposal of Rs.424 crores of cash flowing out of the Company vide their-letter dated July, 2018 and have not given the required NOC to the Company for its buyback offer.
On 16 July, the first trading day since PC Jeweller made this announcement, the stock fell as much as 30 percent and now trades at Rs 78. From Rs 500 to Rs 78 in 7 months.
With absolutely no change in government policy or business conditions.
The only problem – corporate governance. And it just got bigger.
Early Signs Of Trouble
PCJ’s problems began when the year did thanks to a stray disclosure by another company, Vakrangee Ltd., that shows no external appearance of being connected to the jewellery company. But, had bought Rs 112 crore worth of its stock, some 20 lakh shares amounting to 0.51 percent of PCJ’s equity.
Vakrangee told BloombergQuint it was a treasury investment, PCJ was a business partner and hence it had “good visibility on longer term business potential” of the jewellery company.
Curiously, PCJ denied any business relationship with Vakrangee. Both companies’ stock prices took a tumble and haven’t stopped falling since. Vakrangee is down from a year-to-date peak price of Rs 500 to Rs 50.
Interestingly, Vakrangee too had expressed the intention to do a buyback of shares and then changed its mind, but more on that later.
A Question Of Cash And Curious Timing
Firstly, the timeline of PCJ’s buyback announcement is itself riddled with mystery. The company first informed the stock exchanges on Sunday, 29 April that its board would meet on 25 May to consider:
- Financial results for the quarter and year ended 31 March
- Recommendation of dividend
- Proposal for buyback.
Curiously, the next day the stock sank further, from the 27 April closing price of Rs 178 to Rs 145. Turns out, funds run by foreign investor Fidelity sold substantial portions of their stake in PCJ on 27 and 30 April.
On 2 May, the next trading day, the company’s share price dropped to Rs 110. And oddly started rising thereafter even as the company denied news reports suggesting it was being investigated by the Central Bureau of Investigation and that its managing director had been arrested.
On 3 May it closed at Rs 121. On 4 May it jumped to Rs 174.
On Saturday 5 May, the company informed the exchanges that a separate board meeting to consider the buyback proposal will be held on 10 May, earlier than the previously announced date of 25 May.
The next trading day, 7 May, the stock hit Rs 240 but has never recovered to that level since.
PCJ’s buyback offer was for upto 1.21 crore shares or 3.07 percent of the total paid-up equity share capital at Rs 350 per share.
As per company law, a buyback of shares can be done only by using free reserves and funds in the securities premium account.
As of 31 March, 2018, PCJ has free reserves of Rs 1,556 crore and another Rs 943 crore in the securities premium account. More than enough to cover the Rs 424 crore cost of the buyback.
And, yet, the company claims its bankers said no, urging it instead to pay down debt and reduce interest cost.
Interestingly, PCJ’s non-current liabilities show a borrowing of Rs 29.5 crore and another Rs 1,025 crore under current liabilities. That’s total outstanding loans of Rs 1,054.5 crore at the end of financial year 2017-18.
To be sure, that’s substantially higher than the amount reported in the previous year of Rs 691.7 crore. And yet, if all loans were to be paid back in full and the buyback funded, it would cost the company Rs 1,478.5 crore. That’s less than the Rs 2,499 crore it has in free reserves and securities premium.
Maybe the bankers, unnamed by the company, were just being cautious at a time of mounting non-performing assets.
Maybe the bankers were worried about the Rs 3,622 crore in trade payables for FY18. That’s a third almost of its Rs 9,706.5 crore revenue for the year.
- Trade Receivable: Rs 1851.3 crore
- Trade Payables: Rs 3622.25 crore
Or maybe the 1:1 bonus issued in July last year was enough shareholder reward, they thought.
None of this explains why it took these unidentified bankers two months to disapprove the buyback. It’s also rather strange that they waited till just after the shareholder vote closed to say no.
Or did they reject the buyback earlier on but PCJ didn’t disclose it?
The Vakrangee Story
Running parallely to this PCJ saga is the story of Vakrangee, a retail company of sorts.
On 12 February, Vakrangee informed shareholders of a new capital allocation plan approved by its board in a meeting that day. It said it had Rs 1,372 crore in available cash (as of 31 December, 2017) of which it intended to invest Rs 122 crore in the business, spend Rs 250 crore on dividend and allocate another Rs 1,000 crore towards a buyback of shares.
Vakrangee also stated, in a detailed presentation filed with the stock exchanges, that its long term policy hereon would be to allocate two-thirds of capital towards dividend payout and share buyback.
The announcement boosted the stock.
Now remember, the Vakrangee stock price had fallen from a high of Rs 505 on 25 January, to Rs 200 on 9 February, the last trading day before the new capital allocation policy was announced. By 16 February the stock had climbed to Rs 245. But the buyback cheer didn’t last for long and it dipped back to Rs 154 by the beginning of March. Another spurt took it back to Rs 285 after which the share price has only moved southwards.
On 28 April, Vakrangee informed stock exchanges that its auditor, Price Waterhouse, had resigned. The filings offered no explanation for the decision even though it came just days before the annual results were to be finalised.
Later, BloombergQuint reported the auditor resignation was due to the absence of “adequate and relevant information and explanations” regarding the company’s “Election Books, bullion and jewellery businesses”.
To date, Vakrangee has not addressed these issues. But it did find itself a new auditor by 5 May, who within a month of being appointed finished reviewing the full year’s accounts and issued an unqualified audit report.
Curiously, when it announced its full year earnings on 14 June, Vakrangee disclosed the death of its legacy business segment, e-governance. The same segment PW had raised questions about. It also snuck in a new capital allocation policy.
Gone was the promise of dividend payout and buyback. Instead now the company wanted to revamp its 45,000 retail outlets or Vakrangee Kendras and install an ATM in each at a capital investment of Rs 900 crore. The 2020 goal is 75,000 Kendras, each with an ATM.
Just by the way, India has a total 2,10,312 ATMs across all banks, across the country, according to RBI May 2018 data.
The country’s largest bank, State Bank of India, has 59,333 ATMs. Vakrangee is set to beat ’em all.
So, in February, Vakrangee promised to return Rs 1,250 crore to shareholders and in June it changed its mind. Its ‘non-business partner’ PC Jeweller decided to do a Rs 424 crore buyback in May and two months later said bankers didn’t approve.
Shares of both companies are now worth 90 percent less than in January.
Their word... worth 0.
(This article was first published in BloombergQuint.)
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