The revelation that paper production and sales in 2010/11 would be "materially lower" than originally planned was bad enough, but worse was the fact that the company gave no indication of the cause of the problem or its full impact.

If there’s one thing the stock market hates, it is uncertainty, and De La Rue’s share price has subsequently taken a hammering, dropping 27.5% since that initial announcement.

De La Rue’s situation has been exacerbated by the fact that it operates in an industry in which reliability and reputation are paramount. "Quality and production irregularities", which was the euphamism used for what later transpired to be the deliberate falsification of banknote paper quality test certificates at the company’s Overton mill, are not supposed to happen at a business like De La Rue. Rather, security, attention to detail and adherence to six-sigma standards of production are the norm when you run a business that literally prints money.

Since July, when the initial announcement was made, De La Rue’s chief executive James Hussey — a man whom many consider to be irreplaceable — has fallen on his sword, the Serious Fraud Office (SFO) has been called in, investors have been told to expect a shortfall of "at least" £35m in first-half profits, and the sales and manufacturing directors of the group’s currency division have left the business. The whole saga has taken on the appearance of a large skeleton tumbling limb-by-limb out of the Overton closet.

Investor confidence
Under previous chief executive Leo Quinn, De La Rue had become a very safe company, from both a client and investor perspective. It made a series of strategic disposals and established a dominant position in its sector.

However, according to Paul Jones, analyst with Panmure Gordon, this has not always been the case.

"Fifteen years ago, one of the big problems with De La Rue was that if it competed on a banknote order and someone offered six features it would offer eight for the same price and it wasn’t until somebody said, ‘Hang on, shouldn’t we be offering eight for more money?’ that De La Rue started making a lot more profit," he says. "The business went from one that was very volatile in the 1990s and early 2000s to one that delivered consistent profit growth and a number of special dividends, building a great reputation in the City and in its own market. Both of those have been damaged, I think, quite a lot by this."

The damage to De La Rue’s reputation is hard to quantify. Hundreds of millions have already been wiped off its market capitalisation. But, beyond the loss of investor confidence, the bigger problem is the impact this crisis will have on customer confidence. "The market it operates in is all about reputations and, at the moment, its reputation has got a massive question mark over it," adds Jones.

Indian banknotes
The biggest question mark is over De La Rue’s contract with the Reserve Bank of India (RBI), which is reported to have been most affected by the paper production disaster. The contract, which allegedly contributed up to 25% of last year’s group profits, is under threat for two reasons.

Firstly, the fact that De La Rue has been unable to deliver any paper for the bulk of the past two months will have given RBI an excuse to walk away should it so choose. Realistically, due to the volumes involved, this would be unlikely in the short term. However, there have been reports from India that the bank is investing a significant amount of money to increase its own banknote paper production capacity, with a view to becoming self-sufficient by 2013. Either way, when the RBI contract — and others — come up for review over the coming year or two, one can assume that De La Rue will struggle to maintain its margin.

"Clients are going to demand more checking procedures and more costs to go in," says Jones. "And it may well get into a situation again where it’s got to give away certain proprietary know-how that’s very valuable, in order to keep customers. The bottom line for all of this is that — at best — margins go down and at worst it starts to lose contracts altogether."

In the plus column for De La Rue is the fact that it has begun to quantify the financial damage, although Jones believes that the final tally could be considerably higher than the £35m estimate.

The bad news is that the impact is open-ended, because the company’s investigation is still ongoing and because the ramifications from a client point of view could rumble on for some time. Jones believes that it will take another 12 months before we have a clear picture of the scale of the fall-out.

Until then the City, like the rest of us, will continue to watch with interest to see whether the whole skeleton is out of the closet.