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Last Updated : Nov 30, 2015 05:55 PM IST | Source: CNBC-TV18

Sale of pledged shares not reason for slide: Tree House

In an interview to CNBC-TV18, Bhatia says the company is doing fine operationally, and the fall in stock price does not indiacte any fundamental problems. The Treehouse stock is down 46 percent over the last one month

Rajesh Bhatia, MD, Tree House Education and Accessories, says the recent slide in the company's stock price is not due to lenders selling shares pledged with them.

Bhatia says he and his wife had taken a loan by pledging shares as theyw anted to increase their stake in the company. The couple plan to redeem the shares soon.

In an interview to CNBC-TV18, Bhatia says the company is doing fine operationally, and the fall in stock price does not indiacte any fundamental problems. The Treehouse stock is down 46 percent over the last one month.

Bhatia feels the pressure on the stock could have been due to some institutional investor selling its shareholding. 

Below is the verbatim transcript of Rajesh Bhatia's interview with Mangalam Maloo, Ekta Batra & Varinder Bansal on CNBC-TV18.

Varinder: There are two things which market is talking about after the sharp fall in the stock. One is that there are concerns or there are talks which are in the market regarding the pledge of shares by the promoters. Is this has to do anything with the fall and second, we need update on the receivables, what is the situation there?

A: Tree House has 720 pre schools. We do school management for 24 K to 12 schools and our business is robust and business is as usual as far as the company is concerned.

As far as pledge of share is concerned, both I and my wife increased our stake in the company for which we had to borrow money and so we have to pledge shares about two years back.

We haven't sold a single share and I can be categorically stating that none of our lenders has sold any share in the market. If there is any rumour with says that some shares have been sold by the lenders and so on. I would state clearly that not a single share of me and my wife have been sold in the marker by any of our lenders. Our lenders are nice and they continue to support us and they are adequately protected on the margin front.

Varinder: But there is constant selling, as a matter of fact if you see NSE or BSE, there is constant delivery based selling which is happening since the stock is not in Futures and Options (F&O), its only in the cash market or someone must be having delivery of those stocks. Have you figured out any instance from your data collection, any largecap fund who may have sold because of whatever obligations they might have?

A: When a stock like ours which is a small to midcap stock tends to fall below a certain marketcap. We did a qualified institutional placement (QIP) about a year back and a lot of marquee investors invested through various funds on the small or midcap side. I would add that they have certain thresholds within their own fund where if the marketcap falls below a particular USD 200 million marketcap or USD 250 million marketcap, they are forced to sell, because of those kind of limitations which have nothing to do with the working of the company. It has everything to do with their internal assessment and risk management and as far as they are concerned the underlying equities that they can invest in in India, should have a certain marketcap below which if the marketcap goes by a certain percentage points, they are forced to sell.

Now that kind of selling by one or two large investors completely rattles a company like ours and as promoters we been the first generation entrepreneur, it becomes very difficult to give out cash margins to our pledge holders. So the only thing we can do is to we have done an additional pledge to be able to maintain the margin requirements as far as that is concerned. However, that has added in the market that more and more shares are being pledged by the promoters. We are going to release some of our pledge. We are trying to talk to them by way of giving them hard assets that both I and my wife owned and start the reverse process of depledging our shares to bring back the confidence of this and to stop this rumour mongering that our shares have been pledged and those pledged shares are being sold in the market.

Varinder: I want to know two things from you. One is that even if the pledge is there it is around 55 lakh shares which is there in the market, constantly have been upping up the pledge because of margin call supposedly by some of the lenders. It is not a small number of shares considering there is low liquidity in the stock. What is the game plan now in terms of even if you want to redeem the pledge? How much number of shares we can expect that you may redeem, what amount you will need because you as an individual corporate you will want it to happen as soon as possible?

A: We are working on it and we are working with all the lenders in tandem. It is not that all the lenders are in touch and working it in tandem to get solution and to see that all of this is rectified. I would only add that at this point in time I cannot give a disclosure of how much I am going to unpledge but I can definitely tell you that with some of our lenders we are working on the process and we should be able to come out very soon on the unpledging part of it.

Varinder: Is there any other thing because people had doubt on receivables which SES also clarified later on the channel that they got it wrong. Is there anything else which is rattling the market in terms of operational numbers?

A: We do not think so. Ultimately the price fall is a mind game and the mind game plays on investors if they see a price fall and probably they feel perturbed or disturbed that the price has fallen by this extent, so it just kind of cascades and more and more stuff come into the market. I can tell you that as far as the company is concerned, the business is very robust as schools are functioning and as far as business is concerned, there is nothing to do with the business. It is just that the pledge of me and my wife is haunting us at the moment which is something that we are trying to undo.

Mangalam: Fundamentally as well your short-term debt has been increasing and at the same time you are looking to monetise your Baroda property as well. What is the rational for that?

A: I will explain to you that on 600 crore plus net worth of our company, our net debt is Rs 30 crore on Rs 600 crore balance sheet and we have operating EBITDA of 100 crore and we are opening more than 150 pre schools this year. So if you see the business front is completely different from the pledge side of the story - that is very different. As far as monetisation of asset is concerned, we have already monetised our first asset in Rs 17.1 crore in Baroda.

The second that we announced, we are going towards a path where from a net debt of Rs 30-35 crore we want to become cash surplus of Rs 100-125 crore by monetising our assets. This does two things for us, we have a huge cash surplus in our balance sheet which later on we can even think of distributing to our shareholders and what it also does is that the entire reduction in the balance sheet size increases return on capital employed largely which a large number of our investors understand and let me reiterate that we are a consumer discretionary company, so we deal directly with the consumer.

Ekta: Which are the lenders you have pledge with and your interactions with them have been what post such a strong share prices fall?

A: There are JM Financials kinds of lenders and our interaction with them has been wonderful. We appreciate the kind of support they have given us. I can only say that they have adequately margins, so there is no reason of worry at all.

Varinder: What do you think that there could be supply of more shares in the market considering your company is high on institutional ownership, you hold around 30 percent, retail is only 5 percent and rest is with institutions and private equity? So 60-65 percent is held by these institutions, so there could be more supply if those criteria come into play?

A: I do not know the criteria of each and every fund because one is not into the business of looking into those things but if a particular fund sell or one or two fund sells then one tries to understand the reason as the company whether it is more technical than fundamental and having said that one can only say that on real time basis what you are saying is absolutely correct but 22-23 percent of our stock is held by private equity players and they have supported us in growing this company over the last six-seven years and they have not sold the shares. So to assume that they will sell at this point in time, they didn't even offload shares when the price was three times the current prices.

However, I would say there is no reason to get worried or panic on the stock price. This is more technical as far as me and my wife's pledge is concerned and that is something which as a family we have to resolve with the lenders. The company is just doing fine.
First Published on Nov 30, 2015 04:28 pm
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