Mathew Wiechert is no George Soros or Bill Ackman but the self-proclaimed short-seller — who runs a boutique hedge fund in California — has stirred a hornet’s nest on Dalal Street by allegedly calling Rolta’s bluff. The mid-cap IT company, which specialises in geospatial information systems, engineering and design services to enterprises and defence forces, tanked 37% in eight sessions to ₹110 (April 27) after Glaucus Research Group — named after the Greek god of the sea blessed with the power of prophecy — came out with a 32-page report indicating that the ₹2,733-crore (9MFY15 revenue) Mumbai-based company had perhaps cooked its capital expenditures over the years in order to hide its Ebitda overreach.
“Based on the evidence and analysis presented in this report, we believe that Rolta has fabricated its reported capital expenditures in order to mask the fact that it has materially overstated its Ebitda. The margin for error is narrowing: Rolta’s net debt has risen from $319 million in FY11 to $740 million in Q32015 and the company has almost nothing to show for its highly suspicious spending,” says the report.
The company has mopped up over $500 million — $300 million in 2014 and $200 million in 2013 — by issuing bonds to foreign investors. Glaucus has recommended a ‘strong sell’ on the bonds, which are due to mature in 2018 and 2019, by pointing out that the company does not generate free cash flow and, hence, would not be able to repay its offshore bondholders without refinancing.
The hedge fund has set a price target of $0.16 for the bonds, whose prices fell 14% to $85 (2019 bond) and 15% to $87.5 (2018 bond) on the Singapore Exchange. Although Rolta challenged the allegations in a point-by-point 37-page rebuttal, Glaucus responded to it on April 23 with a 27-page-long counter-attack, sending the stock 3.5% lower. Rolta got back with another 25-page rebuttal on April 27. Though the jury is out on which way this tussle will go, Glaucus seems to have drawn first blood.
Digging deep into Rolta’s financials, Glaucus’ primary observation is that Rolta has little to show for its reported capex of ₹7,000 crore incurred between FY08 and FY14, given that its fixed asset turnover ratio is a dismal 0.7X (over FY12-FY14), whic