Failed Shares like a Failed Rocket: Series -2

The second example I am using in FSFR series is very significant one. It gives a classical example of showing how a stock market investing can lead you to loose the entire investment capital!

The second pick in this series is GEODESIC LTD. In last decade, it rose more than 300 times from its lows of Rs 10 to12 (in 2000 to 2002) to its peak of more than Rs 4200 (in 2007 -08 ) effective price while considering the Bonus issues and FV split. But on today’s market, its already suspended from the bourses and facing a legal liquidation procedure from the creditors. [The most number of companies failed – for oblivious reasons - in last decade, are from IT related sector!!]

And in all probability the share holders will get nothing after the liquidation, from its bogus books. God only knows if any creditors also will get any penny from this company.

13 Year Price Chart

Effective Price Chart Vs FD Return

So what went wrong with this tech company? If you analyze the companies from the beginning of 2000, the company was in track in earlier years and even paid decent dividends. But in most probable cases, the company started reporting cooked up figures to increase the share price and market cap [similar lines happened in Satyam case, and its almost proven. But in this case its only a wild guess].

Now let us check the dividend payment track record

Dividend Payment Record
	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Actual on a single share	5	10	10+ 0.2	0.4	0.4	1.6	1.6	1.75	2.75	2	Nil	Nil
Effective for Initial 1 share	5	10	10+0.2*10 =12	* 10 = 4	* 10 = 4	* 15 = 24	* 15 = 24	* 15 = 26.2	* 15 = 41.2	* 15 = 30	Nil	Nil

Nothing wrong can be found analyzing these data along with sales and profit. And common investors may ask how we can differentiate gold from all the yellow glittering? But if we spend little more time with effort, we can find few red signals along with promoters quality degradation issues.

  

The major red signals were visible from Promoters share holding and pledging. Below tables shows these details.

Promoters Share Holding Record
	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Number of Shares (Lakhs)	23.6	20.6	16.6	152	147	147	218	218	209	209	226	88	88
Total Shares (Lakhs)	42.7	42.7	50.67	512	585	588	921	921	920	899	899	903	901
Percentage	55.5	48.2	32.8	29.7	25.2	24.9	23.6	23.6	22.7	23.2	25.1	9.7	9.7

Promoters Pledge Details

Number of Shares Pledged
	2009	2010	2011	2012	2013	2014
Number of Promoters Pledged share (Lakhs)	7.6	0	0	126	35	35
Total Promoters shares (Lakhs)	218			226	88	88
Percentage of Pledge	3.5	0	0	55.6	39.7	39.7

A steadily decreasing promoters holding along with increase in pledge is visible in the above tables. The company increased the debt level to above 600 Crores, mainly for bogus purchases at fancy valuations. If a Tech company goes for bigger acquisitions with steep increase in debt, along with a muted performance, it’s always  giving a red signal.

In one way we may conclude that, the initial investor might have earned much money in the form of dividend than an FD holder, but what about an investor entered in middle or extreme bull phase of this share?

 So this example gives us a clear message that a long term equity investor should be vigilant! And in case if we find something fishy, we have to sell it even in loss (majority of common retail investors hesitate to do this). It will at-least save the remaining percentage of our capital, rather than loosing it completely.

Arrow Coated Product : Update based on SHP

Latest SHP shows a very interesting pattern (as a continuation pattern from the previous quarters and more specific).

Corporate Bodies and NRI investors increased their holding, where Retail investors (Holders Less than 10000 shares) decresed their holding substatially, and a mild reduction in Individual holders holding more than 10000 shares.

A detailed table and analysis is given below.

SHP of ACP

	June 2014		Sep 2014		Difference
Share Holder Category	Number of Share Holders	Number of Shares Held	Number of Share Holders	Number of Shares Holding	(in number of shares)
Corporate Bodies	109	107454	117	139869	+ 32415
Non Resident Indians	54	97414	61	117703	+ 20289
Total					+ 52704
Individual shareholders holding nominal share capital up to Rs. 1 lakh	2071	1432061	2373	1383037	-  49024
Individual shareholders holding nominal share capital in excess of Rs. 1 lakh	42	1197539	40	1193859	- 3680
Total					- 52704
Net Change	(Considering this four groups)				0

If we analyze all previous multibaggers, 95% of time you can see retailers holding (Less than 1 Lakh nominal capital) will be reduced during the initial Bull Run to just before saturation period. Arrow Coated is also showing a similar trend and that too with an aggressive value. Almost 50 K shares changed from retailers to NRI's or Corporate, showing weaker hands exit from this one. If company shows better performance in the coming quarters, this trend is sure to continue, along with share price appreciation.

On the other hand, if share price moves based on operator play, the Share holding of retailers will increase gradually as operators start dumping their ones to the retailers. Check the future SHP too to see and ensure any specific operators plays are going on or not. Anyhow by reading in between the lines -for the past few quarters - the Share Holding Pattern is moving on an expected line showing a bright future for the company and the beginning of a bull run.

Another very interesting fact check

In the past two years annual report of Arrow Coated Products, we might have read from Chairman’s message:

“It is more important to note that besides revenues, the grant of a patent necessarily means the increase in the intrinsic value of the company. Recently, our Japanese competitor bought out the American competitor and paid a very interesting value, which was much more than the value of the bricks and mortar of the company.”

Was aware about the competitors names, as American Competitor (MonoSol LLC - US manufacturer of water solvant film) and Japanese Competitor (Kuraray Co. LTD), but recently only came to get the valuation of the deals. Sharing it here, if you are not checked it.

The details of the deal (Got it from the company website of Kuraray Co. LTD, company business results 2012-2013)

Acquisition cost            US $ 395,825,000

Amount of goodwill      US $ 170,515,000

If we consider an exchange rate of Rs. 60/- for US $, we will get the following figure in Indian Rupee.

Acquisition cost            : 2374.9 Crore

Amount of goodwill      : 1023.1 Crore

Total                            : 3478 Crore

[ Of course, the size of operations and number of patents may not be directly comparable with MonoSol and Arrow Coated, and I have not done any extensive study on these lines. But both these companies are working in the same area / field]

The deal happened two -three years back, when markets were going bear. And in the present bull market, and the present Mcap of Arrow Coated is  236 Crore.

Failed Shares like a Failed Rocket: Series -1

After discussing Financial Freedom Series, I assured you, we will be discussing about few companies, which went like a rocket and later came back to square 1!

If investing in any FFS or like shares at any point in time (not considering very recent investment), even at peaks at past (like tech stocks at 2000) you will be at profit now. Even though few shares may be overpriced as different parameters, they still helped the investors make money, mainly because the business ‘moat’ it had. That means if business and the underlying system is fine, it will generate money (no matter its overpriced or not) – just a business like Coca – Cola.

Now I would like to pen about few picks - as a short series of few stocks- which went 100 times or more in the past, but presently giving returns less than an FD even to the initial investor. These companies were not all bad, but the business strategies failed along with extreme overvaluation.

One such pick is Bajaj Hindustan, India’s largest sugar producer, returned negative in the last decade.

We can check the details, and what made this share to fail like this.

Last decade Price Chart

 Effective Price of BH Vs FD Return

(Price adjusted for stock split)

From the above graph it’s clear that an initial FD holder is well positioned than an BH investor. And what is worse is that, a majority of investors invested after 2003 are in deep loss up to the maximum of -96% !!

What went wrong?

   1 . The government policies and regulations is the number one culprit. Govt. thinks controlling the sugar price is more important than controlling petrol price! Illogical cane price policy made the situation more dangerous.

2. Bajaj Hindustan’s plans to enter in to thermal power generation misfired badly. Even the next major competitor Balrampur Chini was able to sustain better than BH, just due to staying ground. BH’s too much aggressive ambitions made their balance sheet bleeding. And inorder to survive, they finally sold their thermal power plant dreams.

Future out look

1. It will be very difficult for BH to survive, if Govt. is not going to act properly. Also some form of one time subsidies along with sugar de regulation is the only hope.
2. Govt. decision related risks are more and may be in future too, as Govt. changes, policies also may change.
3. Only green light is valuation wise, stock quote reasonably low. But remember this also; ultimately zero is the lowest level a stock can reach!!

Conclusion

Even though we need to invest long in sound companies with great  business, we need to review our companies and investment decision periodically to see the company is not moving in extreme stormy water.