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How Deceptive Appearances Can Be Wealth Destroyers - Views on News from Equitymaster

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How Deceptive Appearances Can Be Wealth Destroyers
Jun 7, 2018

Manpasand Beverages made a stellar debut on the bourses in 2015. Within a year of listing, the stock had surged by over 100% from its issue price of Rs 320 per share.

Brokerages, mutual funds, and retail investors were enamoured by the moat that the company boasted of in its IPO document.

Present in the beverages segment, Manpasand offers a mango based fruit drink under the 'Mango Sip' brand. It also offers fruit drinks and carbonated fruit drinks under the 'Fruits Up' brand as well as energy boosting fruit drinks under the 'Manpasand ORS' brand.

The company claims to have a strong reach in semi-urban markets where it enjoys higher market shares than some of the established names such as Parle Agro (Frooti), Dabur (Real), and PepsiCo India (Slice).

It is worth noting that building a strong franchise in such a short time is not a simple thing.

Parle Agro - that pioneered packaged fruit juice in the country through Frooti - built its wide distribution reach over a period of three decades.

In the words of a reputed asset management firm, the company's strong potential stemmed from the theme of value migration from carbonated drinks to fruit based drinks.

Manpasand's management succeeded in painting a rosy picture of the company. They emphasised the moats of a strong distribution reach, pricing power, and rising market share.

Everyone was floored by the tall claims made but hardly any one bothered to check the management's track record or quality.

In a glaring breach of corporate governance, the promoters held stake in a competing business (Hansraj Agro Fresh) but failed to disclose the conflict of interest at the time of coming out with an IPO in 2015 and further at the time of raising funds through qualified institutional placement in September 2016.

The final straw came last month when the company's auditors, Deloitte Haskins and Sells, resigned as its statutory auditor due to the non-provision of significant information required to complete the audit of financial statements for FY18.

Apparently, Deloitte was unable to get documents and other evidence supporting the costs, revenues, and capital expenditure of the company that finally led to its exit.

Both SEBI and the corporate affairs ministry have started investigations into the non-disclosures and the possible accounting lapses by Manpasand Beverages.

Needless to say, the company's stock has been in a free fall ever since. In the last one month, the stock is down more than 50%. A lot of retail investors have been caught off guard.

The investing world is abound with such inflated angels vying for attention.

The only way to avoid such traps is to refrain from herd behaviour and question the authenticity of the so called 'moat' that a company swears by.

Warm regards,

Madhu Gupta
Research Analyst, ValuePro

Madhu Gupta

Madhu Gupta (Research Analyst), ValuePro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages.

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