Porinju Veliyath, managing director and portfolio manager, Equity Intelligence India, on Friday said that he made a mistake by investing in LEEL Electricals Ltd (formerly Lloyd Electric & Engineering).
The Kochi-based investor in a letter to investors said, "Our investment in LEEL has witnessed a significant capital erosion and I admit that in hindsight it looks a mistake. My assumption that siphoning off in a changing regulatory environment would be difficult appears faulty."
CNBC-TV18 has reviewed a copy of the letter.
In a rare admission, Veliyath said, "LEEL share price is nearly 80 percent low from the cost in most of the accounts. While we cannot rule out a possibility of eventual recovery in the share price, the damage has already been done."
Rare but costly misjudgements like LEEL resulting in permanent loss of capital are humbling and thought provoking for us in our pursuit to create wealth for our investors through long term value investing. Why Veliyath Choose LEEL Electricals: Cash Flow
Received Rs 1,550 crore cash from sale of consumer durable (CD) division to Havells and was trading at Rs 1,000 crore market capitalisation.
Good Track Record
Good long-term operating track record in air conditioning and white goods space, having successfully created and divested the "Lloyd" brand of appliances.
Sold the brand "Lloyd" along with associated intangible assets and had retained the operating assets including 8 manufacturing facilities in India and abroad and was set to continue its business of being an OEM supplier to other major manufacturers.
Tough Regulatory Environment
Post reforms like GST and demonetisation, corporate governance standards, law enforcement and business culture in India was improving and it was getting tougher to siphon off from public listed companies. Also subsequent to the Companies Act 2013, and various Sebi initiatives, the minority shareholder rights were getting stronger.
Given the opportunities that the space in which LEEL operates and being cash rich, the most logical path for the promoters who have been in the business for around 3 decades, would have been to take the company to higher orbits and thereby creating wealth for all the stakeholders involved.
Investment by Porinju: Accumulated nearly 5.4 percent of company by October 2017. By end of February 2018, he held nearly 8 percent of company’s equity. Rosy Quarterly Results: The company reported Rs 946.43 crore profit from sale of CD division in 2Q18 results in November 2017. 3Q18 results published in February 2018 also confirmed the same Rs 946.43 crore profit figure and we continued to buy LEEL. Sudden Demise Of Founder: In December 2017, the promoter of the company Brij Raj Punj passed away and his son, Bharat Punj took over the reins of the company. Shocking Write-Off: On May 30, 2018, the company arbitrarily wrote back the profit from sale of CD division in FY18 annual results to Rs 663 crore. Fund Diversion: The company diverted nearly Rs 340 crore to promoter entities including the listed debt laden entity Fedders Electric Ltd as capex and loans for buying land and factories of their own plants. Legal Remedies: Filed a complaint with Sebi seeking a forensic audit of books of accounts of LEEL Electricals. Top-Level Exits: Group chief financial officer, company secretary and vice-president finance, operations director etc. resigned from the company. Damage To Reputation: Value of LEEL, in most of the accounts have fallen below three percent of the account NAV. Outcome: The auditors of the company in 2Q19 results review report have asked the company management to review the receivables shown in the books.
According to Veliyath, the regulator must protect the interests of the entire minority shareholding community of the company by setting an exemplary precedent in the corporate governance history of Indian listed companies.
Veliyath is one of the most experienced fund managers in India and has an enviable track record of out-performing the stock markets. His first major investment was Geojit Financial Services.In 2002, Veliyath started his own portfolio management firm, Equity Intelligence. Today, his company is creating wealth for his clients using his unique stock selection prowess and the wealth of knowledge on corporate India.