BUSINESS
The bull run during which the Sensex rose from 9,000-odd points in March 2009 to 17,574 points on Friday, June 25, should make investors pause and exercise caution before buying high-value stocks.
The bull run during which the Sensex rose from 9,000-odd points in March 2009 to 17,574 points on Friday, June 25, should make investors pause and exercise caution before buying high-value stocks. The reason is that many weak companies, including several that are Gujarat based, have done deceptively well during the surge on the bourses. It would, therefore, be prudent for investors to do a thorough analysis of the fundamentals of a company before putting their money on its shares.
Mahan Industries Ltd (led by Yogendra Gupta) with its registered address at Mithakhali crossroads, Ahmedabad, is at the top of the list of overvalued companies based in Gujarat.
The company’s scrip price, which was just 27 paisa on March 31, 2009 (adjusted for stock split from face value
of Rs10 to Rs1 per share), is currently trading at Rs8.25 per share — a rise of nearly 3,000%!
But the fundamentals of this company do not justify the 30-fold rise in its share price. The firm’s operations have almost shut down, there are no sales, nor are there any profits or reserves on the company’s books. In addition, its accumulated losses crossed Rs7.3 crore in the 2008-09 fiscal itself, pushing its net worth in the negative.
Mahan Industries Ltd, however, is not alone among Gujarat-based companies in having poor fundamentals but sky-rocketing share prices. There are many others like it.
Ahmedabad-based Scanpoint Geomatics Ltd, headed by Ramesh Sojitra, is another overvalued company. The company has posted losses in eight out of the last 10 financial years. Its accumulated losses have crossed Rs13.95 crore and net worth is in the negative. Yet its share price has risen by almost 2,000% in less than 15 months.
Its share price shot up from Rs3.16 per share on March 31, 2009 to Rs63.30 a share on June 25, 2010. Incidentally, in the past, Scanpoint Geomatics had reported sick to the Bureau of Industrial and Financial Reconstruction (BIFR).
Next in the list is Surat-based Prraneta Industries. The current market capitalisation of the company is over Rs1,000 crore but the company’s sales have managed to cross the Rs10-crore mark only once in the last four financial years. Moreover, Prraneta Industries’ net profit has not crossed Rs1 crore in any of the last five years. Yet its shares are trading at a life-time high and had touched a 52-week high on June 24, 2010. The company’s share price has jumped from Rs3.59 per share to Rs48.
Several other Gujarat-based companies such as Minal Engineering Ltd, Kaleidoscope Films Ltd, Gujarat Natural Resources Ltd, Roselabs Industries Ltd, Well Pack Papers, and Interlink Petroleum have shown little to no growth in revenues or net income in the last 4-5 years. But their share prices have gained in excess of 600% in the last 15 months. The list doesn’t end here. There are many other similarly overvalued companies. So what happened to the notion of healthy fundamentals?
“Investors need to be careful about consequences while investing in such scrips as they could wipe out their investments in no time. In some instances, due to operator-based trading, share prices are artificially increased, despite there being no healthy fundamentals,” said Vaibhav Shah, MD, Monarch Projects & Finmarkets Ltd. Similarly, the shares of Bodal Chemicals and Mahalaxmi Rubtech have gained by around 900%. But the remarkable price rise is much higher than what is warranted by the improvement in their announced results. A city-based broker said on the condition of anonymity that one should stay away from illiquid companies. “The reason is that if the investor wants to withdraw his money at a later date, he may not be able to do so as there would be no buyers for the shares of failing companies,” the broker said. “Sometimes, company insiders also get involved in trading and artificially increase the company’s share price.”
Sales zero...
Although its financials are nothing to write home about, its stock price had increased manifold — from around Rs300 in 2006 to Rs3,000 in December 2009. The company has posted losses in eight of the last 10 financial years and its accumulated losses stand at Rs68.76 lakh with negative net worth of Rs43.76 lakh, as per FY’09 results.
Paraan Ltd was founded in 1972 to provide marketing services to companies in the drugs and pharmaceutical industry, including Alembic. The Alembic Group later acquired control of the company and, in 2008, control of the company passed to other investors.
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