Holy cow!

As Parag Milk Foods’ meltdown comes amid structural and management issues, investor confidence might not return in a jiffy

How often does a promoter pledge a part of his stake to increase his holding in the company? It seems counter-intuitive. But that’s exactly what the promoters of Parag Milk Foods did. All hell broke loose when a persistent query by an analyst during the Q3FY20 earnings call saw the promoter revealing that a loan was taken to increase their stake but refused to reveal the source of funding. On being probed further by analysts, Devendra Shah, executive chairman, said, “It’s a total commercial bank, don’t worry about that.”

But the response was hardly convincing. The stock price, which was already under pressure because of the rise in milk prices (pivotal ingredient for value-added products), collapsed after the earnings call on February 11, plunging 37% to its all-time low of Rs.74.65 on March 2 (See: Crying over spilt milk).

The sell-off began with Religare Invesco Asset Management dumping shares worth Rs.127 million on February 11, followed by the Government Pension Fund Global of Norges Bank, which offloaded shares worth Rs.74 million and Rs.56 million on the BSE and NSE on February 12. “A lot of institutional investors struck block deals after the earnings call. I am actually a little surprised at the number of exits,” says a veteran analyst, who has been tracking the stock, since its listing in May 2016. 

Facing a precarious situation, the promoter issued a clarification on March 2. “The promoters have repaid Rs.310 million of the original loan taken from Kotak Mahindra Investments and the outstanding loan stands at Rs.330 million as on March 2, 2020,” said the company in a filing to the exchanges. The statement said the outstanding amount will be repaid within 90 days and, subsequently, the pledged shares would be revoked.

In fact, Shah had first pledged his stake, beginning June 2017, when the stock traded between Rs.216 to Rs.248. In his defense, Shah states, “We wanted to increase the shareholding in the company post dilution because of IPO and therefore took a loan to increase the stake through creeping acquisition.” As of March 9, the promoters hold 46.20% (38,861,435 shares) stake, of which 29% (11,143,000 shares)


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