In this series of articles, we analyze companies whose stock prices have declined severely in the last 18 months. Though this is a post-event analysis of the stock, studying such examples will give us invaluable insights to avoid such capital losses when picking stocks in the future.

Today, we analyze one such stock – Denis Chem Lab.



The stock price for Denis Chem Lab has come down from Rs 179 in Jan-17 to Rs 39 in Aug-19 which is a loss of a massive 78%

What is the business of Denis Chem Lab?
The company is primarily into the business of manufacturing and marketing of sterile injectables. These are plastic bottles of I.V. fluids in various sizes ranging from 100 ml to 3000 ml

Audit observations
It seems the company has not been properly verifying its fixed assets for several years

Fixed assets 2015

This was a constant observation for the years between 2014 to 2017.
It was only in 2018 that the auditor confirmed that full particulars including quantitative details of the fixed assets were verified by management and the data provided to the auditors.

Fixed assets 2018

Thus, Denis Chem Lab has generally been very lax in maintaining proper accounting records.

Let us look at some other audit observations
Audit observations – year 2015
Audit Observation 2015

The company is not complying in time with depositing statutory dues like employee provident fund (EPF).

Audit observations – year 2016
Audit Observation 2016

The company is not complying in time with depositing statutory dues like employee provident fund (EPF).

Audit observations – year 2017
Audit Observation 2017
The company is not complying in time with depositing statutory dues like service tax and professional tax.
In fact, the company defaulted on a loan repayment of Rs 2.07 Crs during the financial year which was cleared later
Loan default 2017

Audit observations – year 2018
Even in financial year 2018, the company was in default of statutory dues for a paltry sum of Rs 4.34 Lacs.
Audit Observation 2018


History of capital raise
30th May 2014 Rights Issue:
Allotment of 60.28 Lac shares at Rs 13 per share raising a total of Rs 7.84 Cr.
Rights Issue May-14

This money was raised for modernization and expansion of capacity.
Fixed asset increased from 9 Cr to 42 Cr – massive expansion. However, this is what happened to the revenue and profits over the next 2 years

Denis Chem Lab 2014 2015 2016
Revenue 66 75 98
Profit After Tax 1.25 0.08 -4.45
Fixed Assets 9 42 39

Instead of increased profits, the company went in to losses.

12th Dec 2015 Issue of Preferential Warrants:
The company had to raise more equity through preferential allotment of warrants soon in Dec-15
Issue of warrants Dec-15

Allotment of 27 Lac warrants convertible to 27 Lac equity shares at Rs 60 per share raising a total of Rs 16.2 Cr.
Warrants were converted to equity shares by paying the balance 75% subscription money on 14th Mar 2017.
Object of Issue Dec-15

Management expected that the revenue of the company will go up by Rs 4 Cr per month, ie Rs 48 Cr per year. But, what really happened in the next 2 years?

Denis Chem Lab 2016 2017 2018
Revenue 98 112 107
Profit After Tax -4.45 1.24 2.04

Revenues increased only by about 9 Cr per year ie 0.75 Cr per month.
The only positive was that the company returned to profitability

25th Oct 2017 Rights Issue:
Allotment of 21.35 Lac shares at Rs 84 per share raising a total of Rs 17.9 Cr
Soon afterwards, the company had to raise further money through equity dilution.

RIghts Issue Oct-17

This money was raised to implement further capacity expansion.
New Projects 2018

What has been the use of raising so much external equity financing?
The cumulative PAT earned by the company over the last 11 years since 2009 is only Rs 11 Cr. Whereas, the company has raised Rs 43 Cr fresh equity either through rights issue or preferential allotment in the last 5 years. This speaks loudly about the inability of the operating business to generate cash required to operate and expand the business.


So why did people get attracted to this company and buy its stock?
Stock Price - Denis Chem Lab

India was in a bull market and the stock went from 23 Rs in Feb-14 to Rs 180 in Jan-17.
The management was announcing significant capacity expansion and predicting a bullish increase in prospects of the business when they raised equity funds in years 2014, 2015 and 2017.

However, given that the company is not able to run a profitable business and has been in default of statutory dues every year since 2014 and given the fact that it had also defaulted on repayment of loans in 2017 inspite of raising considerable amounts of equity funds, the investor would have been wise completely avoiding investing in this stock.

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