One day, Rs 3,300 cr loss: Here's why GTL shares crashed

How does a corporate group with Rs 3,620 crore in real annual revenues destroy Rs 3,300 crore of investor wealth in just minutes? Either there’s a scam brewing, or there’s very bad news to digest.

On Monday, shares of two companies - GTL and GTL Infra - dropped vertically by 63% and 48.5%, dropping in value from Rs 6,124 crore to Rs 2,856 crore, recording what is probably the steepest percentage drop in companies of this size in one day. While GTL is a telecom equipment company, GTL Infra owns 32,000 telecom towers that transmit mobile phone signals.

[caption id=“attachment_28504” align=“alignleft” width=“380” caption=“Founder Manoj Tirodkar has his hands full with problems. Courtesy GTL Infrastructure”]  [/caption]

While conspiracy theories abound, there is a simple explanation at hand: the selling frenzy was brought on by a realisation that GTL Infra simply has too much debt on its books and the promoters can’t raise the money easily.

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And the capital could not be raised because of the fear psychosis over the 2G spectrum scam, which has put nearly 15 people in jail, including the former Communications Minister A Raja. Investors are chary of putting money in telecom companies when the endgame in the spectrum scam is far from clear.

Share prices of the two GTL companies crashed soon after news hit the market that the group had withdrawn a $300 million capital raising plan for GTL Infra.

While GTL shares fell a whopping 63% to close at Rs 127, the lowest in 54 months, GTL Infra fell 48.5% to an all-time low of Rs 15.25.

Why should the deferment of a capital raising plan cause such havoc? Answer: the companies are in no position to handle the debt burden without a capital infusion.

GTL Infra, with a total debt of Rs 4,470.5 crore and an equity of Rs 957.3 crore, is in a desperate situation. This indicates a debt-equity ratio of more than four as of March 2010 - well above the prudential limit of 1:1. In the year ending March 2011, the company posted a loss of Rs 139 crore against Rs 2.5 crore in the previous year. This means the equity would erode further if no money comes in.

Debt servicing costs and rising fuel prices (diesel to run its telecom towers is its main expense) have knocked the stuffing out GTL Infra’s prospects. Since diesel prices can only rise in future, reducing the debt through a capital infusion was the best option to keep it afloat. But that money isn’t coming. And things could get worse in a deteriorating economic climate. Investors decided to flee even at huge losses.

“There is no surprise as performance does not match the market value,” a fund manager with a foreign mutual fund said. “Over the past one year, the share price has not moved. Something had gotta give,” the fund manager added.

Manoj Tirodkar told the media on Monday that GTL Infra has not gone on a road show to raise capital as market conditions were poor. He blamed the 2G (second generation) spectrum scam for the withdrawal. Tirodkar told Reuters that he believed the telecom sector was under pressure due to the ongoing investigations into spectrum allocations, higher interest rates and low average revenues per user, which may be pulling the stock down.

The group made some ambitious moves when the going was good.

But it was also lucky in some respects. Some deals that would have sunk it for sure didn’t materialise. The group called off a transaction in September 2010 to buy Reliance Communications’ (RCom) telecom tower infrastructure. The company was looking to buy 50,000 towers from RCom in a deal worth Rs 50,000 crore.

Earlier that year, the company acquired over 17,500 towers of Aircel in a transaction worth Rs 8,400 crore that involved substantial borrowing. That’s how the company ended up with debt levels reaching its eyeballs.

Tirodkar brushed aside concerns over a Mauritius company called Technology Infrastructure selling GTL Infra shares. Technology Infra holds an 11% stake in GTL Infra.

“As early as Friday we have spoken to them (Technology Infra) and they are a long-term investor. They have committed that they will remain with the company. So there is no reason for me to believe that that would have changed from Friday to now,” Tirodkar said.

However, between Friday and now the bottom has fallen out of investor confidence.