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How investors should reboot strategy after spotting some early signs of trouble

In June 2013, SpiceJet's chief commercial officer quit after a stint lasting a little over a year. Amonth later, its !" resigne#. $ifferences %ith the promoters an# unhappy a&out the#ecision to slash fares %ere reporte#ly the reasons for the eits. (a# investors ta)en thesetop eits as early signs of trou&les in the airline, they coul# have save# themselves from the

*0+ #rop in the company's value on the &ourses since.

here are tell-tale signs - ranging from &eing the su&tle to the o&vious - seen in companies&efore they falter. hile a particular #evelopment may not threaten a stoc)'s performance,t%o or more signs are reasons enough for investors to eit the counter. hat then shoul# alertinvestors/

Elongating credit cycles

his may &e a su&tle &ut an early signal of &re%ing trou&le. iling tra#e receiva&les impact&ottomline an# affect a company's performance on the &ourses. ut receiva&le as an

accounting item #oes not figure in the quarterly profit an# loss account. Investors have to spotit in a &alance sheet - %ith the etracts release# once in si months.

erformance of plastic goo#s ma)er Sinte In#ustries too) a hit %hen its government-controlle# customers starte# #elaying payments. It a#versely impacte# the gro%th prospectsas %ell as the &alance sheet, lea#ing to erosion in mar)et capitalisation from s ,200 crorein 4ovem&er 2010 to less than s 500 crore in Septem&er 2013. Similar %as the case inmicro-irrigation company Jain Irrigation that suffere# &et%een 6711 an# 6713 as receiva&lesmounte# - one point stretching to nearly one year of sales. esult8 the stoc) lost 59+ ofmar)et value.

Expansion not supported by reality

:ost companies epan# %hen the environment is con#ucive an# there is visi&ility of #eman#to ;ustify capacity epansion. ut there are instances %hen companies li)e J Associatesaggressively fun#e# epansion %ith a pile of #e&t an# companies li)e 4estleS! -0.*1 + thata##e# to facilities even %hen there %ere no clear signs of #eman# ta)ing off.

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JP had been in an expansion mode in cement, real estate and infrastructure segments for nearly a#eca#e, continuing to #o so #espite high interest rates an# slo% economic gro%th. hisresulte# in a mountain of high-cost #e&t even %ith slo% cash flo%. he stoc) crashe# 50+ inthe past t%o years, eiting the 4ifty &as)et in 6e&ruary.

4estle investe# s 3,900 crore in the past four years to increase its manufacturing capacity in

In#ia, epan#ing seven eisting plants an# setting up one ne% facility. (o%ever, most of theepansion catere# to provi#ing mass mar)et pro#ucts to to cost-sensitive consumers ratherthan the premium pro#ucts to the affluent.

ith #eman# for the mass mar)et pro#ucts slo%ing, 4estle's revenue gro%th staggere# tosingle #igits in 2013, against 20+ or more in earlier years.

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Investigation =I> arreste# the company's vice-chairman an# managing #irector inconnection %ith a &ri&ery scan#al. his triggere# a panic sell-off of the promoter hol#ing hel#&y financial institutions un#er ple#ge %ith the stoc) crashing to s 100 %ithin three %ee)s ofthe arrest.

Resignation of key managerial staff

Su##en eit of )ey employees or eo#us of employees is an in#icator of trou&les that coul#&oil over after some time. In Septem&er this year, private sector oil firm (in#ustan "il!ploration ompanyS! -0.30 + =("!> #o%ngra#e# one of its reserves from the provencategory to 'pro&a&le an# possi&le'. ?aluation #o%ngra#es are a ris) %hich all energycompanies have to live %ith. (o%ever, %ithin %ee)s of this #o%ngra#e, ("! announce# theresignation of its managing #irector an# three in#epen#ent #irectors, reflecting a #iscor#&et%een the senior management an# the company's Italian parent. A month thereafter, thecompany announce# financial restructuring involving %aiving off of repayments to%ar#s theoutstan#ing foreign currency loans. he company's stoc) has halve# to s 32 since the eit ofits managerial personnel.

Raids, Arrests & Inspections

egulatory actions li)e ta rai#s, inspections, an# arrests are often too-o&vious-to-ignoresigns of imminent trou&les. In August 2011, the income ta =I-> #epartment rai#e# thepremises of tech-&ase# e#ucation provi#er !#ucomp SolutionsS! 0.00 +. In the samemonth, the managing #irector of its peer !veronn !#ucation %as arreste# &y I for &ri&ing ata official. Ami# question mar)s on the via&ility of their &usiness mo#els, the unsettling#evelopments #eepene# the fears an# triggere# selloff in the stoc)s. oth !#ucomp an#!veronn stoc)s are currently tra#ing at one-tenth of their August 2011 levels.

6$A inspections an# %arning letters can #ramatically change the gro%th outloo) for a #rugfirm - as it happene# in the case of an&ayS! -0.3@ +. he Ipca

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leave much time for small investors to react - &y then, large investors %ith greater access toinformation have ha# alrea#y sol# the stoc) an# &rought the price #o%n. ut there are signalsthat are less o&vious an# give investors an escape %in#o%.

ith mar)ets running ahea# of reality - &e it fun#amentals or reforms - an# glo&alimpon#era&les unli)ely to #isappear, 2019 coul# %ell &e a year %hen investors have to )eep

an eye on every signal.