Don't be in a hurry to exit stocks of firms like Syndicate Bank, Bhushan Steel: Experts

Shares of Syndicate Bank, Prakash Industries and Bhushan Steel fell sharply last week, after the chairman of Syndicate Bank and 10 others were arrested on charges of accepting bribes to enhance the credit limits of Prakash Industries and Bhushan Steel. Investors in Bhushan Steel were the worst hit the stock fell 45% during the week. There was no exit route available for investors as the stock froze on the lower circuit with no buyers. Obviously, investors are concerned.

However, experts ask investors to analyse how the situation will impact the future performance of each company before taking a decision.

"Understand what impact this will have on the business before taking a decision," says Pankaj Pandey, head of research, ICICI Securities. He feels that promoter-driven companies are likely to be hit more than Syndicate Bank and advises investors to hold on to the state-run lender. The chairman of the State Bank of India (SBI), one of the largest lenders, announced that they will look for a management agency to run the day-to-day affairs of Bhushan Steel. However, analysts are not impressed. "Bringing these companies back on track will be a longdrawn affair. Business will suffer and the financial performance could deteriorate," says Phani Shekhar, head (PMS), Angel Broking. He advises investors to exit Bhushan Steel and Prakash Industries.

PERFORMANCE WILL DETERIORATE

Most analysts believe that both Prakash Industries and Bhushan Steel will suffer as the promoters won't be able to take key decisions. Bhushan Steel has a huge debt of Rs 40,000 crore on its books and has incurred a loss Rs 57 crore and Rs 20 crore for the quarter that ended in December 2013 and March 2014 respectively.

Its interest costs rose from Rs 446 crore in 2011 to Rs 1,663 crore in 2014, while profit declined from Rs 1,005 crore to a mere Rs 62 crore. Prakash Industries saw its profits slip from Rs 267 crore in 2011 to Rs 173 crore in 2014. "Lenders and bankers have become cautious, which will impact financial performance further. Crucial decisions on fund raising and expansion will be postponed," says Shekhar.

However, analysts believe that it will be business as usual for Syndicate Bank as the ownership lies with the government. "The government will increase vigilance and further fresh cases may crop up, which may lead to a further increase in NPA slippages," says Pandey.

Net profit for the quarter that ended in June 2014 increased to Rs 485 crore from Rs 409 crore in the previous quarter.

EXIT PROMOTER-DRIVEN COMPANIES

Bhushan Steel and Prakash Indusetries have had corporate governance issues in the past too. Bhushan Steel's Patrapara coal block was de-allocated by the government after the recommendations of an inter-ministerial group. Prakash Industries, reportedly forged documents to get coal mines allocated in both the states and diverted nearly 50% of coal to the black market. The arrest of their promoters comes as another blow to investors. Though the SBI indicated that it will push for a management change in Bhushan Steel, the process could be long-drawn.