Lenders should take charge of S Kumars, says IiAS Report

Lenders to S Kumars Nationwide Ltd. should take charge of the loss-making textile company or appoint a new management to pull the "leaderless" firm out of the muddle, proxy advisory firm Institutional Investor Advisory Services (IiAS) said in a recent report.

"S Kumars is a leaderless company. The lenders have withdrawn their board nominees and institutional shareholders have exited the stock, leaving retail shareholders to hold the baby," said the report.

S Kumars is now 91.5 per cent owned by retail shareholders, as per the company's shareholding pattern as on December 31, 2014. The bankers so far have lent more than Rs 4,500 crore to the company and IiAS recommend them to either take control or appoint a new management to rescue the company. Shares of S Kumars are trading around Rs 3 apiece on the BSE, down from the 52-week high of Rs 7 on July 23, 2014. It market capitalisation has also more than halved to Rs 81 crore since then.

A group of shareholders with 21 per cent of S Kumars has called for an extra-ordinary general meeting (EGM) on April 27. An EGM can be called on a short notice by shareholders holding more 10 per cent of total equity capital. The agenda of the EGM is to remove the board of directors, including the promoter, and form a new board. "That S Kumars' board needs an overhaul is obvious, but this will not pull S Kumars out of the quagmire, and neither will the agitations of an amorphous group of retail shareholders," the report said.

According to IiAS, the long-term solution is institutional Investors taking control of the company. S Kumars' retail shareholders own 91.5 per cent whereas less than four per cent of the shareholding is with promoters. "The lenders have an exposure of over Rs 4,000 crore in the company (as debt).... the promoter owns only around 4 per cent of the equity and the group of shareholders who are wanting to take over are untested. If they come and fail, the banks have most to lose," said Amit Tandon, founder and MD, IiAS.

Kumars, which owns textile brands such as Reid & Taylor, S Kumars and Bellmonte, is in deep trouble. The company's performance has worsened. It posted net loss of Rs 354 crore in 2012/13 on a consolidated basis. The company last published its annual report in 2012/13 and it held its last Annual General Meeting was held almost two years before. The consolidated financial results are not available for the latest fiscal, but according to its standalone quarterly results the company made a net loss of Rs 465 crore in 2013/14. The company promised to publish its financial statements for the 18-month period ended September 30, 2014, but it is still pending till date. S Kumars has overlooked various corporate governance practices.

As per the report, S Kumars' auditors have qualified the last audit report for lack of confirmations of receivables, inadequacies regarding physical verification of inventory and fixed assets. Receivables aggregated 60 per cent of 12-month revenues ended March 31, 2014 (standalone; based on quarterly results), which shows that most sales are not backed by actual receipt of cash. There are mismatches in closing inventory with the opening inventory levels of the immediately following year. S Kumars is defaulting on debt and undergoing a debt restructuring programme, which is its second restructuring in last 10 years.

The lenders extended the quantum of loans and even the number of lenders increased in S Kumars since 2008/09 even when they were reporting negative cashflows. Though the company continued to report profits till 2011/12 its receivables on average were 50 per cent of sales. "This is seen as an early warning sign of impending liquidity stress by most discerning lenders, and bankers seem to have read this and withdrawn their board nominees over 2012 and 2013," added the report.

IiAS recommends that the lenders should intervene and take control of the company. The banks could either appoint a management or have the company sold. Alternatively, they must enforce personal guarantees and file for winding up and bring closure. The banking sector must take responsibility for its lending actions and demonstrate that it can right the wrongs by turning it around, the report said.

"The banks should work with ARCs (Asset Reconstruction Companies) and see if the company can be reconstituted. Otherwise sell it and exit...you can't let it drift along. Lenders are never keen on taking over...as they say it's not their business to run companies. Having said so, they need to recover their money in the end and they can't be indifferent," Tandon added.