Think before you leap to invest in Vijay Mallya companies

It seems Vijay Mallya (VM) has taken on huge debt to fulfill his expansion plans. His Rs. 6900 crore debt story is as follows:

(a) Investment holding company of United Breweries Holdings (UBHL) has been used 81% of it stake in United Spirits (USL) as collateral to raise money for loss making Kingfisher Airlines.

(b) 27.8% of VM’s stake in UBHL has been used as collateral for loans for various purposes including KingFisher Airlines.

(c) USL has also pledged 17.2% of its shares to acquire Shaw Wallace and Whyte and Macay.

(d) Kingfisher Airlines has also used corporate guarantee to fund acquisition of Deccan Aviation.

(e) The pledges and corporate guarantees account for 44% of Uinted Spirits, VM’s flagship company.

According to VM’s statements, it seems that he is the only person with logic and that nobody should fear as these guarantees and pledges are top-up securities. I think the investors should think twice before investing in his companies because with share prices falling, VM maybe asked to give more top-up securities. Also, do we still know the complete story? I doubt it. For instance, what are the credit obligations of Kingfisher Airlines. At least, I know that he owes money to Pratt & Whitney, Rs. 1000 crores to oil companies and over Rs. 200 crores to Airport Authority of India. One also needs to find out if he is paying the vendors of his various companies in time.

Whenever you extend yourself beyond your means, you will end up into trouble. To get out of trouble you will start manipulating something or the other leading to corporate fraud. Once you have almost most of your assets on the line, then the temptation to do wrong also increases.

Fortunately for VM and USL stockholders, the oil prices came down substantially and improved the cash flows of Kingfisher Airlines. Also, VM used his influence to get certain benefits which eased the pressure on VM’s cash flows.

You know in such situations, the corporate honchos could be transferring money from one firm to another as inter-corporate loans. I feel that the interest of shareholders of companies from where funds are being transferred are also put at risk. I don’t know much about the regulations related to intercorporate loans but this is something that the government should look into.

I have stated in one of my posts that newspapers, especially business newspapers, have the obligation to its readers to analyze a particular issue a little bit in more detail and ask intelligent questions. Newspapers like The Economic Times was going ga ga over all these foreign acquisitions by Tatas, UB and others without asking where the money was going to come from. They have the ability to do indepth analysis but don’t. Similarly, all these newspapers have been going crazy about reporting the various new ventures and retail formats of Biyani without asking where the money is going to come from and also what happened to the ventures and retail formats announced earlier. I have been raising this question for quite sometime on my blog. Even in Satyam’s case, journalists should have asked where the money is coming from to purchase such a large land bank but nobody did?

We have heard the phrase, “Think before you leap.” Well, this is very appropriate if you are thinking of investing in Vijay Mallya’s ventures as of right now. And if I was running a business newspaper or its editor, I would keep an eye on Vijay Mallya’s company and maybe even launch a serious investigation to find out the financial situation of all his companies.

Avinash Narula

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I like reading your blog , i have just started delving in equities and am always curious about so many things which your blog helps me out with. Good luck with all the great work.

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Mr. Narula is Diageo doing the right thing by looking to invest in Mallya’s companies? It is common knowledge that he lacks financial discipline and the real value of his companies will be far lower than what the dressed up books say. Diageo will be making a mistake by investing into UB in my opinion.

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