Impact of Gold Price Crash on Gitanjali Gems, Its Share Price & Company’s Fixed Deposit Offer

by Shiv Kukreja on July 6, 2013

in Investments

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Will you deposit your hard-earned money with a company for which even the existing lenders have closed their doors? Is 11.5% rate of interest for 1-year deposit or 12.5% rate of interest for 3-year deposit attractive enough for you to risk your principal investment itself?

Shilpa raised a query regarding Gitanjali Gems’ Fixed Deposit scheme under Suggest A Topic.

Shilpa Ganeriwal  July 4, 2013 at 9:16 am

The recent full page advertisement in ET about the fixed deposit scheme launch by geetanjali jewellers looked interesting. THe interest rate offered was 11.5 %. I was looking for CRISIL rating or any such type but could not get.

My question is what could be the reason for such a way of raising money, is it something like an NBFC and how reliable could this be.

Details of Gitanjali Gems Fixed Deposit Scheme:

The company does not allow premature withdrawal during first 6 months from the date of deposit. The terms of the deposit also states “Request for premature withdrawal may be permitted after 6 months with specific reason at the sole discretion of the Company only and cannot be claimed as a matter of right by the Depositor”.

Also, even if you are permitted to withdraw your investment anytime after 6 months, the company will pay 1% lower rate of interest than the applicable rate.

As I started writing this post, the share price of Gitanjali Gems Ltd. was at Rs. 181.10 on the National Stock Exchange (NSE) and Rs. 183.15 on the Bombay Stock Exchange (BSE), locked down at the lower circuit of 5%. Let me tell you that there were 404 sell orders pending on the NSE alone, with the sellers desperate to find an exit door by selling 1,32,37,259 shares of the company. But they are not able to do so as the buyers are just not interested in paying even Rs. 181.10 for a stock which touched an intraday high of Rs. 534.05 on June 20th this year and has fallen 66.08% since then, hitting new 52-week lows.

In fact, Gitanjali Gems is not the only stock in the Gems & Jewellery sector which has seen a sharp fall in its share prices. Titan, Shree Ganesh Jewellery House, Tribhovandas Bhimji Zaveri (TBZ) etc. are some of the companies which have suffered huge market cap erosion due to a sharp fall in their share prices in the last one month or so.

Gitanjali Gems 1-Year Price Chart

Titan Industries 1-Year Price Chart

Shree Ganesh Jewellery House Limited (SGJHL) 1-Year Price Chart

Tribhovandas Bhimji Zaveri (TBZ) 1-Year Price Chart

Images Source: Bloomberg.com

 

The primary reason behind this huge fall in the share prices of all these companies which belong to the Gems & Jewellery sector is very well known – a steep fall in gold prices in the international markets, which was triggered by fears of the US Federal Reserve tapering quantitative easing (QE). Gold prices have fallen around 35% from a 52-week high of $1804/oz on October 4th last year to touch a 52-week low of $1179/oz on June 28th last week.

Also, the government and the Reserve Bank of India (RBI) have taken several measures in the past few months to slow down gold imports, which have been blamed for the widening of our current account deficit (CAD). Last month, the government raised the import duty on gold from 6% to 8%, after which the RBI issued a notification, restricting gold imports only with 100% cash margin. Due to all these factors, gold demand has slowed down considerably here in India.

But, what is wrong with Gitanjali Gems? Analysing its financial statements, it seems the company has been doing quite well in the past and stands on a very strong footing. So, do the measures taken by the government and the RBI make business so difficult for the company that it is likely to see a sharp fall in its profitability or make the company default on its loans and other credit facilities? Are all these the only factors behind this kind of a steep fall in the share prices of Gitanjali Gems? I do not think so. I think there is something else also and SEBI is likely probing that.

SEBI’s surveillance department has taken up the matter and sought reports from exchanges on the stock’s sharp price movement. Market rumors also suggest that SEBI is also examining a suspicious trading link between Gitanjali and Prime Securities, a well known broker firm. It suspects that Prime Securities had a role to play in the internal funding of as much as Rs. 75-100 crore during Gitanjali’s IPO period.

At the end of March 31, 2013, Gitanjali Gems carries a gross debt of Rs. 5,000 crore in its balance sheet, at an average rate of interest of approximately 8%. As on this date, the promoters of Gitanjali have around 34.96% of their shareholding being pledged with their lenders.

Since June 18th, Gitanjali Gems has made several filings to the BSE, in which it has disclosed that Mehul Choksi, Chairman and Managing Director of Gitanjali Gems, has purchased a large quantity of Gitanjali shares from the open market and have pledged them further to the company’s lenders. In the past few days, some of the lenders have even invoked these pledges, including Macquarie Finance (India) Private Limited (MFIPL) which has invoked 5 million pledged shares in just two days, June 28th and July 1st, acquiring 5.43% stake in the company. Lenders generally invoke pledged shares when a borrower, faced with a steep fall in its share price, is not able to deposit additional margin with the lenders.

So, amid all this high-tension drama playing out within the company and the gold market, is it advisable to lock your money for 3 years in Gitanjali Gems’ Fixed Deposit scheme for 12.5% annual return?

Personally, I am not going to do that as the safety of my principal is more important for me rather than a promise of higher returns and I am sure the investors also know the answer and need no further advice regarding the same.

Some financial advisors have different views regarding the same and their views are also welcome.

Myinvestmentideas.com

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ProfitKrishna.com

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{ 21 comments… read them below or add one }

Krunal July 6, 2013 at 12:41 pm

Hi shiv i just want a little clarification on this..

Is this immense price fall mainly because of lenders invoking pledged shares and selling them in the open market or also because of anchor investors and promoters exiting the company..
Thanks in advance

Reply

Shiv Kukreja July 6, 2013 at 2:29 pm

Hi Krunal,
I dont think there are any signs of promoters selling their holdings and exiting the company. I’m not sure about the anchor investors also, but yes, the lenders are clearly invoking the pledged shares and are ready to convert it into cash whenever they see an exit opportunity. The positions are leveraged, the lenders are seeing default on their loan payments. Naturally, the buyers are missing.

Reply

ramamurthy July 6, 2013 at 1:08 pm

Shiv
Muthoot and Manappurm gold finance companies issued NCD,s about 3 years back and the issues were big success.I think the NCD,s are due for redemption in late 2014 and early 2015.What is your opinion ? are they likely to default?

Reply

Shiv Kukreja July 6, 2013 at 2:39 pm

Hi Mr. Ramamurthy,
I dont think I am the right person to answer this query. But, I think if the borrowers of Manappuram & Muthoot start defaulting on their loan payments, as the gold prices fall further from here, then all these companies will find themselves in some kind of trouble, similar to what happened with SKS Microfinance.
Muthoot has applied for a banking license on July 1st and that is why I think it should be a financially sound firm to have applied for it. Manappuram is relatively riskier.

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Mayank July 6, 2013 at 1:42 pm

Hi Shiv, Could you pls educate how you know there are X number of sellers still at 181.. is it visible on the NSE site? You mention “with the sellers desperate to find an exit door by selling 1,32,37,259 shares of the company”. Thanks, Mayank

Reply

Shiv Kukreja July 6, 2013 at 2:42 pm

Hi Mayank,

Please check this link:
http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=GITANJALI&illiquid=0

Sell Price and Sell Qty. are the fields about which you are seeking information.

Reply

Shiv Kukreja July 8, 2013 at 8:42 pm

Hindu Business Line analysis of Gitanjali Gems Fixed Deposit Offer:
http://www.thehindubusinessline.com/money-wise/gitanjali-gems-dulled-by-risks/article4889041.ece

Reply

Manshu July 8, 2013 at 9:09 pm

I would have been surprised had their conclusion been anything else.

Reply

Shiv Kukreja July 9, 2013 at 10:15 am

I agree, same here… :-)

Reply

Vinod July 9, 2013 at 12:32 am

What is the difference between Annual interest rate and Effective annual yield

Reply

Shiv Kukreja July 9, 2013 at 11:11 am

Hi Vinod,
The difference is due to compounding of interest. The interest payable here is compounded on a quarterly basis, if the investor opts for the cumulative interest option. If you do quarterly compounding of 11.5%, 12% & 12.5%, you’ll get 12.01%, 13.34% & 14.89% respectively as the effective rate of interest or effective yield.

Reply

Jalpesh Patel July 9, 2013 at 4:18 pm

Hi Shiv, Hi Manshu,

What is your view on comparable fixed deposit (rate 11.5% for 2 years) from United Spirits?
I understand that the balance sheet is a bit stretched for United Spirits as well but,
– Stock price has gone up manifolds
– With Diageo (Foreign Co) acquiring majority stake
the probability of defualt SEEMS to be very low.
To me this one seems to be the SAFEST COMPANY FIXED DEPOSIT AVAILABLE in the market and worth considering for allocating a small portion (around 5%) of your debt portfolio.

Please do share your views on United Spirits FD.

With Regards,
Jalpesh

Reply

Shiv Kukreja July 9, 2013 at 7:56 pm

Hi Jalpesh,
Risks & rewards go hand-in-hand and higher the risk, higher should be the reward. Still, personally I do not advise people to invest in company FDs. It is better to invest in company NCDs, Bank FDs, post office schemes, FDs of NBFCs, including housing finance companies, like HDFC, LIC housing finance, DHFL, M&M Finance etc.

I do not agree with your view that it is “the SAFEST COMPANY FIXED DEPOSIT AVAILABLE in the market”, but it is your view and I do not oppose that. Also, as I do not follow United Spirits, I do not know much about its financial soundness. But, you are right, if its deal with Diageo acquiring majority stake gets completed and if Diageo assumes all its liabilities, then the financial position of the company and the safety of FDs should improve further.

Reply

Shiv Kukreja July 19, 2013 at 7:22 pm
Shiv Kukreja July 26, 2013 at 11:28 pm
Pooja August 21, 2013 at 3:07 pm

Hi Shiv,

I had a question on the recent ups and downs in the Gitanjali Share. I really don’t understand why is everybody afraid of buying Gitanjali gems. I have seen most of the FII’s and DII’s are investing in Gitanjali Gems whereas they are removing money from other companies in India. I have started averaging my stocks. Can anybody suggest a way forward analysis?

Reply

Shiv Kukreja August 22, 2013 at 11:32 am

Hi Pooja,

If you are following this stock religiously, then you must be aware that there is some SEBI probe going on against N Jayakumar of Prime Securities, the promoters of Gitanjali Gems and some other related entities. The outcome of this probe might result in some strict action against the guilty parties. So, its one’s personal choice what he/she wants to do with it. If somebody (individual, FII or DII) is buying this stock, probably he/she is taking some calculated risk. It is stock market, you are free to do what you think & want to do.

Only God can do the way forward analysis with certainty. Humans are doing what they can. Event risk can spoil all the analysis done, whether the stock is Satyam Computers, Financial Technologies, MCX or Gitanjali Gems.

Reply

Pooja August 22, 2013 at 11:44 am

Yes I have been following it very closely. But the point which struck me was the FII’s and DII’s, may be they are taking calculated risk but if you seen the trend they are divesting from the other companies but investing in Gitanjali. There has to be some calculation behind that.

Reply

Shiv Kukreja August 22, 2013 at 12:00 pm

Probably they know what we dont. I think DIIs are selling bcoz they have redemption pressures and FIIs selling is overhyped. Even if they sneeze, the entire market catches cold or even beyond that. It is something which is created by the brokers or fear of something very bad happening in future.

Reply

purvib August 21, 2013 at 6:17 pm

Looking at the current scenario I am expecting a rise in the share price to around 400 and will hold my current stocks of gitanjali

Reply

Shiv Kukreja August 22, 2013 at 11:34 am

Sure… I wish it goes to the levels it was at before this price crash !!

Reply

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