Private equity funds slip as KS Oils slides
Moneylife Digital Team 19 August 2011

The crash of KS Oils Ltd underlines the perils of how PE funds can also get it very wrong

Private equity (PE) players, who come with billions of dollars of cash, pick up significant stakes in firms and often work with managements to improve performance and exit at a profit. Their stock picking is supposedly based on excellent research of companies, sectors and markets. But it's quite a different experience for these players who happen to step into the Indian corporate sector which is a minefield of poor corporate governance. The recent crash of KS Oils is a classic example.

On 16th August the company's share price crashed by a whopping 32% on the Bombay Stock Exchange (BSE) following months of steady decline. Its biggest lender, Sicom Ltd, sold around 23.84 lakh shares which were pledged by the company.

That same day, Edelweiss Finance and Investment Limited sold around 44.50 lakh shares on the BSE at Rs9.13 a share. Earlier, on 12th August, Sicom had sold 25.78 lakh shares of KS Oils at Rs12.96 on the National Stock Exchange. The company has pledged around 80% of its shares against loans. There are stories doing the rounds that funds have been grossly mismanaged.

KS Oils, whose scrip has plunged by 90% since January 2010, had received investments from some large PE funds. In May 2009, Rajat Gupta-promoted, Asia-focused New Silk Route (NSR) invested around Rs135 crore through preferential equity shares. Also, Citigroup Venture Capital and Baring Private Equity Partners Asia invested Rs49 crore each through subscription to convertible warrants.

Currently, NSR Direct owns a 9.5% stake and Baring has 5% stake in KS Oils, which produces cooking products like mustard oil, rapeseed oil plus others like refined blended oils, vanaspati and also non-edible solvent oil. Baring bought into KS Oils when it acquired 50,000 acres of its palm oil plantations in Indonesia.

The third largest private investor in KS Oils is astute NRI businessman Siva Sankaran, who has an over 8% stake in the company through Siva Ventures. Siva has been the last resort for troubled businessemen. Those who know Siva well believe that he would not be a sitting duck, unlike some other private equity funds, and that he would find a way to get his money back. Siva also has a stake in Ruchi Soya, India's largest soya processing company.

It is most strange that Barings and NSR picked KS Oils from among a host of Indian companies that have comparatively better governance and stable finances.

Moneylife had earlier reported that the Intelligence Bureau in December 2010 noted massive price rigging and insider trading in KS Oils. (IB report available with us.) The company has also been accused of tax evasion. So what did the philanthropic Mr Gupta find attractive about this investment?

Two years back, New Silk's investment in high-profit 9x media group crashed and burned. 9x News was spun off from INX Media, after apparent large-scale mismanagement. It was probably the first case in India where private equity investors asked promoter-shareholders to get out of the management.

In a filling to the Bombay Stock Exchange on Wednesday, KS Oils informed that its chairman Ramesh Chandra Garg has sold 3.05% of his holding. With this sale, Mr Garg's  share holding has is now down to 8.23%. Other institutional investors continue to offload shares.

1 decade ago
now ksoils buy or hold
roohul haq
1 decade ago
Looking at the companies growth over the past 3-4 years, i must admit 2 or 3 reasons why there was a huge pledging of shares and subsequent sell offs

1. The promoters were too optimistic with buying huge land banks in Indonesia and de-risking the geographical mix.

2. The PE funds did not realise the downside of the investment call per se, going more with the reputation and strong performance of the company.

3. The huge debt burden as on August(debt/net profit) is high =10.4 which will take another 7-8 years to re pay.

Moneylife Research Desk
1 decade ago
This is with ref. to Mr N\'s comment below. When we recommended, the stock was Rs80. It went up to Rs142. A 20% trailing stop loss would have meant exit at Rs113. Not bad. An exit of 20% on purchase price would have meant exit at Rs60 by June 08 - 3 years ago! Of course, you can hold on until it becomes bankrupt and goes to 0 and blame us. Your choice :)
By the way, do you want to go and check out how the other stocks from the same cover story have done?
R Balakrishnan
1 decade ago
The co has not yet put up quarterly results for June 2011 on its website. Wonder???
Replied to R Balakrishnan comment 1 decade ago
Moneylife itself recommended this stock very strongly at Rs.70 twice, abt 3-4yrs back. I bought into it and now suffering.
Replied to N comment 1 decade ago
You remember what moneylife wrote so well "abt 3-4 yrs back.
You should also have remembered the stop loss that Moneylife recommends, precisely because of such situations.
Besides, it is upto us what to buy, when to buy and when to sell. I don't know about you but I don't expect anything more from Rs25.
Oh how did you miss Moneylife expose on price rigging in KS Oils that was there in IB report? You could have sold months ago, provided you had kept your eyes open. Its your money after all.
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