Forbes has an excellent article on what went wrong at OnMobile. It was a certain Mr. Arvind Rao, it seems.
On November 23, 2010, Arvind Rao, the 53-year-old co-founder and CEO of OnMobile, bought approximately 6 lakh shares of his company from the open market, representing a little over 1 percent of the company’s total shares. Rao already owned over 10 percent of the company’s shares.
At Rs 277 a share, he had to pony up nearly Rs 16.5 crore to acquire them. [Deepak here: This money was borrowed]
OnMobile’s shares continued to fall from those levels, while Rao’s interest payments ballooned.
Consumed by the downward spiral of his baby and his worsening personal debt situation, his characteristic energy and enthusiasm waned, visible to most of his senior colleagues.
In an attempt to provide a floor to OnMobile’s share price, Rao managed to push through a controversial share buyback plan totalling Rs 25 crore last year, despite serious reservations from other board members.
Motivated by OnMobile’s growth all these years, he had never paid much attention to his salary, most of which went towards the monthly rental on his sea-facing apartment in Mumbai and his BMW 7-Series, both paid directly by the company.
He requested the board for a significant salary increase, arguing (rightly) that his Rs 1 crore salary was substantially below what the market would pay the CEO of a Rs 600-plus crore international company. But they would have none of it.
Finally, left with no option—at least the way he saw it—Rao took the ‘shortcut’. Just that once.
In November 2011 OnMobile’s finance department received a set of bills from a vendor they hadn’t dealt with before. The bills amounted to nearly Rs 12 crore—a large enough sum to set alarm bells ringing. They had been forwarded directly by Arvind Rao.
The rest of the story: The bad stuff hit the fan, and Rao was in control in December 2011 when the CFO Rajesh Moorti resigned presumably in protest of the CEO doing this drama. Mouli Raman, the CTO and co-founder, and H H Haight, the representative of the largest investor Argo Global, got to know and Haight took over as chairman. Rao was shunted to "international operations".
Then a new CFO, Amit Rastogi came on board, questioned the payments of 12 crore, and subsequently resigned. KPMG conducted an internal audit and found there were some weaknesses, after which Rao resigned in June 2012. Supposedly, the 12 crore has been since returned.
In all of this the stock, which had hit a high of over Rs. 300 (after considering a 1:1 bonus - the real price was 600+) had fallen to nearly Rs. 31, and has since recovered to about Rs. 42.
The buyback was for a piddly 40 lakh shares, for an amount of Rs. 24 crore. That is likely to be overshadowed by the ESOPs being granted.
Arvind Rao and co-concerns Riff Mobile and Oskar Habitat have had many of their shares pledged, which were invoked in July. The Insider Trading page shows that around 35 lakh shares have been invoked by lenders (an amount that translates to around 15 cr.). It seems that only a small part of Arvind Rao's personal holding has actually been sold.
From a shareholding perspective, a "Small Cap World Fund" has sold over 5% of the company, as have Kotak with about 34 lakh shares or 3% (after invoking the pledge). Even Argo Global seems to want to exit. HDFC Mutual Fund acquired about 5% of shares recently.
The company isn't too badly off, earning 0.80 per share in the June quarter results. (I don't like it that they had pre-tax profit of 16 cr. but paid Rs. 9 cr. as tax? Which high-tax country are they in?)
They don't have much debt. The market cap, at the price of about 42, is about Rs. 500 cr. (5 billion). Profits were around 9 cr. last quarter, which is very ridiculously low margins (5% of their revenues of 185 cr.) but at least it's profit. They had about 51 cr. of other income in Q2, 2011 due to their sale of stake in Verse for 46 cr. - that's a one timer. If you assume they make about 45 cr. this year - in spite of a slowdown, a crunch on VAS, overloaded debt in mobile cos and so on - the company has a 11 P/E. This is not expensive, but this is not ridiculously cheap either.
The technical charts see this going up a little more, of course. I will have to post a tech analysis at another time.
The company needs a CEO and more investors. They need to become a higher margin operation. They need to reinvent themselves, and what better time than one in which the economy is slowing. This could be a turnaround story or one that lingers around for a long time without dying.
Disclosure: no positions. Though I wish I had bought this yesterday for the 10% upmove today. Ha.