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Why there is a need to be extremely cautious on CG Power after 30% fall

Shares of CG Power and Industrial Solutions plunged 30 per cent on Wednesday after the company said its consolidated net loss widened to Rs 150.18 crore for the December quarter.

The scrip closed 29.63 per cent down at Rs 23.75, while the BSE Sensex declined 119.51 points, or 0.33 per cent, at 36,034.11.
After the fall, there is a need to remain extra cautious on the counter, as 100 per cent of promoters’ holding has remained pledged with lenders since March 2017. Average share price of the company was Rs 72.60 in March 2017.

Sameer Kalra, Equity Research Analyst and Founder, Target Investing, said CG Power is facing a high debt and low cash flow problem. The analyst, which has a ‘sell’ rating on the stock, believes some of the pledge shares might have come to the market on Wednesday itself.

Investors may not be able to get a stable price to exit until the company gets some relief from its lenders, said Kalra. He said usually pledged shares are sold irrespective of the share price, as lenders are more concerned with selling certain quantity.

In general, as shares of companies with high pledged shares drop, lenders may invoke the collaterals, causing such stocks to fall further.

On traded volume, 81.53 lakh shares got traded on the counter on BSE against a two-week average of 8.81 lakh shares. More than 11.35 crore shares traded on NSE.

There is nothing unusual about pledging of promoter shares. Promoters usually offer their shares to provide additional collateral for maintaining debt lines or infuse capital in other promoter entities. But in cases where share pledge is done to fund other business interests, it becomes a little risky. More so when such businesses underperform and do not generate cash flows, says Elara Capital.