The man who lost 90 per cent of his fortune twice

The man who lost 90 per cent of his fortune twice Mehul Choksi's Gitanjali hit by gold curbs, distributor defaults and liquidity crunch.

The 91.9 per cent slide in the stock price of Gitanjali Gems since April has depleted the value of promoter Mehul Choksi’s holding in the company by at least Rs 17 crore (Rs 170 million) a day on an average.

His 59.44 per cent stake in the firm, valued at nearly Rs 3,300 crore (Rs 33 billion) in April, is now worth only a little over Rs 260 crore (Rs 2.6 billion) -- a plunge of over 90 per cent in a little over two quarters.

During this period, the Gitanjali Gems shares have skidded from Rs 649.5 to Rs 52.5 on Friday.

As on June 30, he held 55 per cent in the company.

For Choksi, there might be a sense of deja vu.

During the stock market slump between mid-January 2008 and early March 2009, Gitanjali’s shares had crashed from over Rs 400 to less than Rs 40 but recovered in line with the broad market rally in the late 2009.

But this time, hopes of an immediate share price recovery appear dim, as the group faces troubles on multiple fronts.

Unaudited results show, the net profit of Gitanjali, which owns brands like Gili, Asmi, Nakshatra, D’damas and Sangini, in the June quarter fell to Rs 148.97 crore (Rs 1.48 billion) from Rs 35.12 crore (Rs 351.2 million) in the same quarter last year -- a 76.42 per cent slide.

The recent measures take by the government and the Reserve Bank of India to lower gold imports has hit the firm’s jewellery business.

Besides, Gitanjali, which is present in the country’s 300 cities and towns, has faced defaults from distributors.

“. . . Many of our customers -- small players that were selling as distributors -- were not able to pay in time.

“These factors -- established fixed cost and non-payment by some customers — led to bad debt.

“So, it’s a combination of all these that has contributed to poor quarterly profit numbers,” said Choksi.

What adds to the woes is that Gitanjali and Choksi have been under the regulatory scanner, too.

The Securities and Exchange Board of India and the National Stock Exchange disabled the Unique Client Code of 26 entities, including that of Choksi, following a probe into trades in the shares of Gitanjali Gems in an order passed in July.

NSE had also announced an investigation and a decision to halt pay-outs for the transactions being probed.

Besides Choksi, the barred entities include Prime Securities Ltd.

However, the Gitanjali Gems promoter maintains that neither he nor his company had anything to do with Prime.

“We don’t know the broking house. We have no account or dealing with that firm,” he said.

“One of the broking firms had in its portfolio many firms’ shares, including Gitanjali’s.

“So, the probe was on the broking firm, and not Gitanjali. Since NSE had financial losses in the transaction involving Gitanjali shares, there is a suspension and inquiry going on.”

Choksi is hopeful that the matter would be sorted in a few weeks.

“A week after announcement of the suspension, we sought clarifications from NSE. “A number of letters have been exchanged between NSE and us; communications are taking place on a weekly basis,” he added.

An NSE spokesperson declined comment on the matter.

The probe has come at a time the company is reportedly facing a liquidity crisis. Credit rating agency CARE had flagged concerns in July.

Banks are said to have a Rs 4,500-crore (Rs 45-billion) exposure to the group, even as its profits have nosedived.

But the group maintains it has serviced Rs 4,500 crore of its debt so far, with no issue.

The company, however, is trying to hold on to whatever cash it has.

Recently, its board agreed on a dividend but the promoters later opposed it, defeating the resolution by voting against it.

Exchange filings show at least some institutional shareholders were not in support of the move against the dividend but Gitanjali maintains it still has the backing of its institutional shareholders.

“It is incorrect to say institutional shareholders opposed it.

“At the moment, in the current scenario, money in the company is more necessary than money moving out,” said Choksi.

Arun Kejriwal, director at investment consultancy Kris, said the outlook for the stock was glum.

The problems started with shares being pledged, and then sold, in the market.

The issue with promoters opposing a dividend proposed by the board is also extraordinary.

“There is a severe lack of confidence in the company now. Investors are unlikely to pick up the stock in a hurry,” he said.

The promoters had pledged holdings which were equal to 34.96% of the total shares in March, which is said to have added to the selling pressure in the stock.

On the business front, expansion has slowed down in India and the company is ‘optimising’ costs.

"We are opening stores very cautiously.

“It’s not any capex driven stores that we are opening. India. . . expanding only franchisee route, distribution route and shop-in-shop route," he said.

The company hopes to cut Rs 100 crore (Rs 1 billion) in costs.

“Last year we had Rs 1200 crore (Rs 12 billion) of expenses on around Rs 16,000 crore (Rs 160 billion) worth of sales.

“So merely 7-8 per cent.

“It was international expenses . . . we can’t save much.

“But the India part; the salaries, the admin costs, the traveling expense; we are synergising a lot of it.

“So I believe out of the remaining Indian expenses Rs 600-700 crore (Rs 6-7 billion) if we can save 10-15 per cent, that’s what we are targeting.

“It will add around Rs 100 crore (Rs 1 billion) to the bottomline,” he said.

These moves are in sharp contrast to the heady days of its expansion.

The size of the company’s retail network rose 30 per cent, from 1.3 million square feet in 2010-2011 to 1.7 million square feet in 2011-2012.

Though the testing times may force Gitanjali to limit expansion for now, Choksi is dreaming big for the future.

“Believe me, 50 per cent of Indians are below the age of 25 years and most of them are yet to get married.

“So, each marriage if you take into account a minimum Rs 20 lakh (Rs 2 million) worth of jewellery spend, it is close to a trillion dollar jewellery consumption in 10 years," he says.

For the man who has lost a fortune twice, optimism is not in short supply.

Image: Mehul Choksi; Photograph, courtesy: Business Standard