Failed Shares like a Failed Rocket: Series - 3

The third and the final one on this series, I would like to pen about a company which made majority of the investors (particularly investors after 2006) in deep loss, mainly because of the valuations investors paid for the shares.

Real estate was the King in the previous Bull Run (2003 – 2008), and the share I am discussing is none another, but UNITECH.  Majority of the investor community might be familiar with the name. There are more than 6 Lakh retail investors shown in their latest share holding pattern by the company.

12 Year Chart of UNITECH

There may be mainly two types of reasons for people remembering UNITECH. Those who made a killing, by finding it early, and others who went like a flock to become the prey.

The obvious reason you may assume now is the company is bad. But company as such or their intentions were not that much negative. They too struck with the overall sluggishness and slowdown.

But what made the investors loosing their hard earned money up to a great extent? We will look in to the details and the level of loss happened to investors shortly. But before that we can look in to the details of those who made a killing by entering early and exiting at appropriate time.

Those who made a Killing

In the entire Indian share market, you can show only very few that increased the value with a very limited time. In the case of Unitech, with in a time period of less than 5 years, the share price amplified from Rs 45/- [Jan 2003] to Rs 71000/- ( Ofcourse adjusted for split and bonus, [Rs. 546 * 130 Share in Jan 2008]).

A Rs. 10,000 invested in 2003 might have become Rs. 1.57 Crore that too with in 5 years!!

A detailed chart showing the growth

What happened next?

By the time everybody was numbing about the Real estate sector, the reverse trajectory started. And an investor who put money in the peak might have lost more than 95% of the capital till on today’s market price.

The Reason

Year	2002 - 03	2003 - 04	2004 - 05	2005 - 06	2006 - 07		2007 - 08
Sales (All figures in Crores)	239	373	509	653	2503		4140
Net Profit (NP)	11.6	14	29.9	69.6	983		1661
Total Debt	132	131	323	686	3605		8117
Share Price	43	103	349	6346	427		546*
Total shares (in Crores )	1.24	1.24	1.24	1.24	81.16		162.3
MCap	53.3	127.7	432.7	7869	34655		88615
MCap/ NP ratio	4.6	9	14	113	35		53
Remarks	At all of these valuations, it was an attractive value buy.			Gradually beginning to be risky		Assigning a 50+ PE for a company with almost 1 Lakh Crore MCap ?   Along with a steady increase in debt level (that too increasing more than the total sales) Ridiculous!!

The above table simply shows how much ridiculous the valuations were at that time. Surely at initial growth time, companies may a command higher PE’s and increase debt, but assuming a 50+ earnings to valuation was too much for a company trading with a MCap of around 1 Lakh Crore! along with alarmingly increasing debt levels; but people were very much positive or literally blind at that times.

So while investing your hard earned money, always try to find the comfort zone based on valuation view. In market there are enough opportunities for every patient investor, so it doesn't matter even if you miss few companies.

PS : This is just for fun, while Unitech was trading around its peak (ie at Rs 70000  [or actually at Rs 500 level, after the split and bonus]), in one popular investment magazine query column, there was a question from an investor asking when Unitech will hit Rs 5000? (ie 10 times from peak = almost 9 Lakh Crore MCap), and surprisingly the reply was, it will hit the target for sure in near future, but we cannot give a time frame! 

I hope atleast few readers might have gone through that query and answer :)

Happy Investing!