Wednesday, March 24, 2010

Some more pain

Extending my previous post, following are some more charts of stock prices of some companies over the last three years:

The first one is from Subex Systems and the second one is of Northgate Technologies.

Subex reached a peak market capitalization of INR 2775 Crore in January 2007. Today, company's total market capitalization is less than INR 250 Crore, a loss of more than 90% from peak. When did the story start getting interesting? Looking at the shareholding pattern of the company, we can see that the promoters started offloading their stake in big chunks after September 2004. Surprisingly, the shareholding pattern for December 2004 was never released by the company and it seems that the promoters sold 1.3 million shares between September 2004 and March 2005 and the promoter shareholding came down from 43.45% to 27.02%, more than 16% in just two quarters. This was followed by sale of 0.22 million shares in September 2005 quarter and 0.48 million more shares in December 2005 quarter taking the promoter holding down to just 18.61%. After 1:1 bonus in January 2006, promoters offloaded 1 million more shares in March 2007 quarter, taking the promoter holding down to just 8.73% if GDRs are included. The promoters started their buying binge from March 2008 quarter and increase their stake in the company from 3040960 shares in December 2007 to 4101801 shares in June 2009, promoter holding increasing to 10.48%. Even after this, 61.15% of the promoter shares have been pledged as collateral to financial institutions. Surprisingly, Alex J Puthenchira was representing promoters till September 2005, but is part of public from June 2006.

Northgate reached a peak market capitalization of around INR 2600 Crore in July 2007. Today the company's total market capitalization is just INR 65 Crore, a loss of 97.5% from peak. The promoter holding in the company has come down from 11912980 shares or 34.18% in December 2007 to 10948782 or 31.27% in December 2009. Reliance Growth Fund had bought a large stake in the company (100000 shares) in September 2006 quarter when the share price was hovering between INR 325 to 568. Till March 2007 quarter, the holding came down to around 599497 shares. After 1:1 bonus in August 2007, the mutual fund was holding onto its stake till March 2009. The complete offloading of shares happened in June 2009 quarter when the price was hovering between INR 30 and 60. Even if we assume the best pricing, the 599497 shares acquired at INR 360 were sold for INR 120 (double 60 due to 1:1 bonus) after two years and six months, a loss of 66.67% of the invested capital. Although the absolute loss was just INR 14.39 Crore, which is very small compared to the AUM (Assets under management) of INR 6,733 Crore, a value investor would not be able to digest this investment. The company has a business model which has not been tested over time. The market capitalization at that time compared to sales was also very high, of the order of 7 to 8 times. Company's sales had gone up by ten times between 2004 and 2006 (from INR 8 Crore to INR 80 Crore), so the market capitalization to average sales of last three years (which value investors prefer) would be more than 15 times. People even started talking about investing in the company based on the fact that Reliance Growth Fund holds 7% in the company. Be vary of investing in a company based on the fact that others have invested in it. You don't want to call yourself a fool for somebody else's mistake.

The analyst cannot be right all the time. - Benjamin Graham
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mash said...

I am a regular reader of ur far has failed miserably in stock markets ...reading to buildup skills..
could u please analyse jayaswal neco...i ill be greatful

Chinmay said...

Hi Manoj, looking at your blog, I found that you are more interested in trading than investing. My blog is fully devoted to fundamental analysis and finding undervalued companies. This requires investment of at least three years. Regarding trading, I can only provide you one quote from Benjamin Graham:

Almost by mathematical law more speculators must lose than can profit.

Regarding Jayaswal Neco, I don't have any understanding of the business of the company. I will see if I find enough information and will provide a post if I get time.


Chinmay said...

Hi Manoj,

I had a bird's view on the financials of the company and found that the company had INR 1006.56 Crore in debt and the net worth was just INR 588.45 Crore at the end of last financial year. The ratio 1006.56/588.45~2 is four times that of what Benjamin Graham would consider safe for industrial companies. So I would give a pass to this company.


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