Somany Ceramics tanks as broker defaults

Mumbai: Shares of Somany Ceramics plunged 20% on Monday after a stock broking firm defaulted on its repayment of Rs 26 crore to the company. Analysts said failure to recover this money would erode the company’s FY20 earnings by around 34% of its estimated net profits for the year.

The company told stock exchanges that the cheque issued in favour of the company by its stock broker bounced due to insufficient funds.

The company said it had paid Mentor Financial Services Rs 26 crore to invest in bonds.


In response to an email query, a Somany spokesperson said, “The Rs 26 crore was the total exposure to the broker for purchase of bonds, which not materialised and therefore a cheque was given by them towards refund of money.”

The company reported a net profit of Rs 46 crore in FY2019 as against Rs 70 crore in FY18.

Mutual funds including Franklin Templeton, L&T, DSP Aditya Birla Sun Life, HSBC and UTI held 22.59% stake in Somany Ceramics as on June 31, 2019.
“In the quest to earn higher yields, Somany has been investing in market instruments through its stockbroker, which used to park surplus funds at higher yields for the interim period before the same was invested,” said Nehal Shah, analyst, ICICIdirect.com, while downgrading its rating on the stock to ‘hold’. “If it fails to recover the amount, it would lead to provisioning for it in Somany’s P&L, which will lead to significant deterioration in its FY20 earnings.”

Mentor Financial also owes the company about Rs 9.1 crore, which has been classified as inter-corporate deposit (ICDs). The company spokesperson told ET it was classified as loan because it was an advance to the broker which bore an interest.

The stock, which declined more than 75% since January 2018, ended at Rs 228.80 on Monday. In May, Somany filed a police complaint against two of its officials alleging siphoning of about Rs 16 crore.

Analysts said Somany’s investment of Rs 29.9 crore in SREI Infrastructure Finance bonds remains a concern.

“SREI Infrastructure bonds may lead to some diminution in the value of investment, which in turn may have to be provided for in company’s balance sheet in FY21,” said Shah of ICICIdirect.com.