Exit the stock when a company goes for CDR

Recently, when Pipavav Defence and Offshore Engineering stock started rising after the company announced that the board has approved a debt restructuring package. The announcement was made after market hours on March 31. The next day stock price went up 5.59% to Rs 60.45 during intra day trade.

Similarly, positive movement in share prices were seen when other companies went for corporate debt restructuring (CDR). These include companies such as Suzlon and Gammon India.

“The stock prices jump as such stocks are previously punished for excessive debt and they underperform the market,” said Daljeet Kohli, Head of Research at IndiaNivesh Securities. But he also adds that this does not mean that investors should rush to invest in such stocks.

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He explains that the companies resort to CDR when their books are heavily laded with debt and they could be defaulting on loan repayments. Most of these companies are badly managed and that’s the reason why they are in bad shape.

Nirmal Gangwal of Brescon Corporate Advisors, who has helped at least 200 Indian companies restructure debt and executed transactions aggregating to over $ 7 billion since the last 10 years, explains that in a typical debt restructuring the company asks lenders to give them a moratorium period for repayment and the interest rates are brought down. In some cases, even fresh money (new working capital) is infused in the company.

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“Though the perception is that the company is badly managed, and in some cases its true, there are firms which have a good business potential but could not repay debt as external factors affected their margins,” said Gangwal. He adds that the last five years have not been good for global as well as Indian economy where many companies have seen their margins erode impacting their profitability.

Stock market experts say that it’s always better to stay away from the companies that are heavily into debt. News of debt restructuring may mean that the company has got a new life line but new investors should not invest thought there could be positive movement in the stock prices. Existing investors, on the other hand, should use this opportunity to exit the stock and cut their losses.