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5 Midcap Stocks that Could Go Bust in 2023

Oct 3, 2022

5 Midcap Stocks that Could Go Bust in 2023

The pandemic has disrupted the economy, and we are still battling its after-effects.

Most companies had to shut down their operations completely due to the lockdown. However, many companies returned stronger and could turn their business around in no time.

But some companies just couldn't cope with the effects of a pandemic. Even after the economy opened up, they are struggling to return to their pre-pandemic state.

Falling sales, rising debt, and accumulation of losses are some problems these companies are facing. With the interest rates rising, and inflation going up, the future is looking bleak for them.

Here are five midcap stocks that go bust in 2023.

#1 MMTC

First on our list is a government of India enterprise, MMTC, which was set up to facilitate foreign trade and export and import essential minerals and metals.

Its operations span six segments, metals, precious metals, minerals, fertilisers and chemicals, agro products, and coal and hydrocarbons.

Being the largest exporter of minerals in India, it was given the status of 'Five-star export house' by the government.

But this five-star export house has been losing its shine for the last few years. Its financials are deteriorating, losses are increasing, and the future looks bleak.

In the last three years, MMTC's revenue fell by 23.5% per annum (compound annual growth rate - CAGR), driven by the pandemic. It has also reported a net loss for the last three years due to high provisions.

The company's total debt on its books is Rs 26 bn, all of which is short-term. It is struggling to pay the debt and interest as its cash reserves were impacted due to the lockdown.

Even in June 2022 quarterly results, the company's revenue declined by 69% year on year (YoY). It also reported a net loss of Rs 1,313 m, led by high-interest expenses.

Recently, the company completed the divestment of its subsidiary, Neelachal Ispat Nigam (NINL), where it holds a 49.8% stake. The company plans to use the divestment proceeds to pay off its debt and use the remaining to improve the business.

It is to be seen how the company will make a turnaround after clearing all the debt on its book.

To know more about MMTC, checkout its factsheet.

#2 The Fertilisers and Chemicals Travancore

Next on our list is another public sector enterprise, Fertilisers and Chemicals Travancore (FACT).

Its primary business is to manufacture and sell fertilisers and their by-products. The company has an established market position in south India and receives strong support from the central government.

In the last three years, FACT's revenue has grown at a CAGR of 17.5% due to high production and sales.

However, the same is not reflected in the profit growth. Its net profit declined by an average of 28.7% in the last three years due to high raw material prices. As a result, the net margin contracted from 35.2% in 2020 to 8% in the financial year 2022.

There is also a considerable amount of debt on its books. It has a total long-term debt of Rs 102 m as of 31 March 2022, which it owes to the government.

Though it has requested the government to restructure its debt into equity, it awaits approval. Until then, it has to make interest payments regularly, which affects its cash flows.

The availability of fertiliser inputs at affordable prices remains key to its performance.

To know more about FACT, checkout its factsheet.

#3 Shoppers Stop

Third, on our list is India's leading premier retailer of fashion and beauty products, Shoppers Stop.

The company sells products of both private and own labels in its stores. Apart from a strong retail presence, it has an online presence through its website and mobile application.

Shopper's Stop, a well-known fashion brand in the Indian retail space, has been losing its glamour in recent years.

In the last three years, its revenue fell by 8.4% (CAGR), due to the pandemic. The company's net loss as of 31 March 2022 stood at Rs 454 m.

It has a long-term debt of Rs 896 m on its books with a debt-to-equity ratio of 1.2x and an interest coverage ratio of 0.6 for the year ending March 2022. Moreover, the promoters have pledged close to 10% shares raising questions about its fundamentals.

In the June 2022 quarter, the company's revenue improved by 254% YoY due to a lower base. However, it posted a net profit of Rs 228 m against a net loss of Rs 1,049 m the previous year.

Despite improvement in operations, a low-interest coverage ratio, high debt, high competition in the retail space, and increasing interest rates will impact the company's profitability in the medium term.

Any reduction in debt and improvement in liquidity might help the company stabilise.

To know more about Shoppers Stop, checkout its factsheet.

#4 Swan Energy

Swan Energy, initially incorporated as Swan Mills, is a textile manufacturing company.

It has a manufacturing capacity of 360 lakh meters per annum at its plant in Gujarat.

Recently, it also ventured into real estate by converting its land parcels into residential and commercial complexes and is earning rental income from them.

The company, along with its subsidiaries, is also setting up a floating storage and regasification unit with a capacity of 5 m tons per annum.

With a diversified revenue profile, the company managed to increase its revenue in the last three years by 12.2% (CAGR). However, its losses have increased from Rs 48 m in 2020 to Rs 1,579 m in the financial year 2022.

The company's debt has also almost doubled from Rs 19 bn to Rs 35 bn in the last year. As a result, its debt-to-equity ratio increased to 2.8x in the financial year 2022 from 2.3x the previous year.

A promoter pledge offsets the company's high promoter holding. The promoters have pledged close to 14.4% shares.

In the recent quarterly results, the revenue grew fourfold by 464% YoY, but the company's losses expanded by 25.3%, and it reported a net loss of Rs 495 m for the quarter.

Growing debt, high losses, promoter pledges, and low liquidity are raising red flags for the company.

However, improving operations and profits, debt repayment, and faster implementation of the new projects might help the company turn around its business.

To know more about Swan Energy, checkout its factsheet.

#5 Lemon Tree Hotels

Last on our list is Lemon Tree Hotels, the largest mid-priced and third largest hotel chain in India.

The company operates in upscale, mid-priced, and economy segments. It has a network of 84 hotels across 50 locations in India.

Lemon Tree Hotels also has international operations in Dubai and Bhutan and is expanding to Nepal by setting up two hotels.

Apart from its international expansion plans, it is investing to increase its network of hotels to over 100.

Despite the increase in travel post-Covid due to 'revenge tourism', the company didn't see its operations improve. In the last three years, the revenue declined by 14.3% due to the pandemic. The net loss has also expanded from Rs 104 m to Rs 1,384 m in the financial year 2022.

Though the company maintained its long-term debt, the interest coverage ratio deteriorated to 0.2 times.

The company has a low promoter holding of 23.9%, and the promoters also pledged close to 14.7% shares.

In the June 2022 quarter, the revenue grew by 317.9% YoY because of a low base and an increased tourism demand. The company also reported a net profit for the first time in the last eight quarters.

Despite an improvement in quarterly performance, high debt, low-interest coverage ratio, and low promoter holding will continue to be warning signs.

Improving the company's operations, reducing debt, and improving profits will help the company turnaround its business.

To know more about Lemon Tree Hotels, checkout its factsheet.

Will these companies go out of business soon?

The companies mentioned above may go out of business in 2023.

Certain red flags indicate something is wrong with the company. These red flags shouldn't be ignored. Some of these are consistent losses, high debt, loan defaults, selling pledged shares, and rating downgrades.

All these might affect the company's short- and medium-term performance. If you identify such red flags in the companies you have invested in, then monitor their financials and fundamentals closely.

If a company is not fundamentally strong, it is probably not worth investing in.

Stock picking is very tricky, but with proper research about fundamentals, one can make it big.

Luckily, Equitymaster has a checklist which saves you from such toxic stocks.

Check out our 5-point checklist which will save you from toxic stocks.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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1 Responses to "5 Midcap Stocks that Could Go Bust in 2023"

Virat Trivedi

Oct 4, 2022

Except Rahul Shah's "The 5 point checklist to save you from toxic stocks"; none of the rest 6 links are working!
If you can fix that, kindly drop a mail.
Regards,
Virat TRivedi

Like (1)
  
Equitymaster requests your view! Post a comment on "5 Midcap Stocks that Could Go Bust in 2023". Click here!