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How You Could Have Avoided Losing Money in The Stock of Denis Chem Lab?

The stock price of Denis Chem Lab declined severely from Rs. 179 in January 2017 to Rs. 39 in August 2019, representing a loss of 78%. Audits found the company was consistently late depositing statutory dues and defaulted on loan repayments. Despite raising Rs. 43 crores through various equity offerings since 2014, the operating business struggled to be profitable and cash flows were insufficient to properly operate and expand. Investors were attracted to the stock during the bull market but would have been wise to avoid it given the company's inability to run a consistently profitable business while remaining compliant with statutory obligations.

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154 views9 pages

How You Could Have Avoided Losing Money in The Stock of Denis Chem Lab?

The stock price of Denis Chem Lab declined severely from Rs. 179 in January 2017 to Rs. 39 in August 2019, representing a loss of 78%. Audits found the company was consistently late depositing statutory dues and defaulted on loan repayments. Despite raising Rs. 43 crores through various equity offerings since 2014, the operating business struggled to be profitable and cash flows were insufficient to properly operate and expand. Investors were attracted to the stock during the bull market but would have been wise to avoid it given the company's inability to run a consistently profitable business while remaining compliant with statutory obligations.

Uploaded by

Sam verm
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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How you could have avoided

losing money in the stock of


Denis Chem Lab?
AUGUST 25, 2019

In this series of articles, we analyze companies whose stock prices


have declined severely in the last 18 months. Though this is a post-
event analysis of the stock, studying such examples will give us
invaluable insights to avoid such capital losses when picking
stocks in the future.

Today, we analyze one such stock – Denis Chem Lab.


 

The stock price for Denis Chem Lab has come down from Rs 179
in Jan-17 to Rs 39 in Aug-19 which is a loss of a massive 78%

What is the business of Denis Chem Lab?


The company is primarily into the business of manufacturing and
marketing of sterile injectables. These are plastic bottles of I.V.
uids in various sizes ranging from 100 ml to 3000 ml

Audit observations
It seems the company has not been properly verifying its xed
assets for several years

This was a constant observation for the years between 2014 to


2017.
It was only in 2018 that the auditor con rmed that full particulars
including quantitative details of the xed assets were veri ed by
management and the data provided to the auditors.
Thus, Denis Chem Lab has generally been very lax in maintaining
proper accounting records.

Let us look at some other audit observations


Audit observations – year 2015

The company is not complying in time with depositing statutory


dues like employee provident fund (EPF).

Audit observations – year 2016

The company is not complying in time with depositing statutory


dues like employee provident fund (EPF).

Audit observations – year 2017

The company is not complying in time with depositing statutory


dues like service tax and professional tax.
In fact, the company defaulted on a loan repayment of Rs 2.07 Crs
during the nancial year which was cleared later
Loan default 2017
Audit observations – year 2018
Even in nancial year 2018, the company was in default of
statutory dues for a paltry sum of Rs 4.34 Lacs.
Audit Observation 2018

History of capital raise


30th May 2014 Rights Issue:
Allotment of 60.28 Lac shares at Rs 13 per share raising a total of
Rs 7.84 Cr.
Rights Issue May-14

This money was raised for modernization and expansion of


capacity.
Fixed asset increased from 9 Cr to 42 Cr – massive expansion.
However, this is what happened to the revenue and pro ts over
the next 2 years

Denis Chem Lab 2014 2015 2016

Revenue 66 75 98

Pro t After Tax 1.25 0.08 -4.45

Fixed Assets 9 42 39

Instead of increased pro ts, the company went in to losses.

12th Dec 2015 Issue of Preferential Warrants:


The company had to raise more equity through preferential
allotment of warrants soon in Dec-15
Issue of warrants Dec-15
Allotment of 27 Lac warrants convertible to 27 Lac equity shares
at Rs 60 per share raising a total of Rs 16.2 Cr.
Warrants were converted to equity shares by paying the balance
75% subscription money on 14th Mar 2017.
Object of Issue Dec-15

Management expected that the revenue of the company will go up


by Rs 4 Cr per month, ie Rs 48 Cr per year. But, what really
happened in the next 2 years?

Denis Chem Lab 2016 2017 2018

Revenue 98 112 107

Pro t After Tax -4.45 1.24 2.04

Revenues increased only by about 9 Cr per year ie 0.75 Cr per


month.
The only positive was that the company returned to pro tability

25th Oct 2017 Rights Issue:


Allotment of 21.35 Lac shares at Rs 84 per share raising a total of
Rs 17.9 Cr
Soon afterwards, the company had to raise further money through
equity dilution.

RIghts Issue Oct-17

This money was raised to implement further capacity expansion.


New Projects 2018

What has been the use of raising so much external equity


nancing?
The cumulative PAT earned by the company over the last 11 years
since 2009 is only Rs 11 Cr. Whereas, the company has raised Rs
43 Cr fresh equity either through rights issue or preferential
allotment in the last 5 years. This speaks loudly about the inability
of the operating business to generate cash required to operate
and expand the business.

So why did people get attracted to this company and buy its
stock?
Stock Price - Denis Chem Lab
India was in a bull market and the stock went from 23 Rs in Feb-14
to Rs 180 in Jan-17.
The management was announcing signi cant capacity expansion
and predicting a bullish increase in prospects of the business when
they raised equity funds in years 2014, 2015 and 2017.

However, given that the company is not able to run a pro table
business and has been in default of statutory dues every year
since 2014 and given the fact that it had also defaulted on
repayment of loans in 2017 inspite of raising considerable
amounts of equity funds, the investor would have been wise
completely avoiding investing in this stock.

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