From January 2008 till now, over 300 firms have shed 90% value

Mumbai: Shares of DLF Ltd, Financial Technologies (India) Ltd (FTIL),Suzlon Energy Ltd, Jaiprakash Associates Ltd, Reliance Communications Ltd, Moser Baer India Ltd and Karuturi Global Ltd have seen an over 90% erosion in value since 2008, making them major wealth destroyers in recent times.

BSE’s benchmark 30-share Sensex is up 32.85% since 8 January 2008—when it touched a then-closing high of 20,873.33 points—to 27,730.21 points on Monday.

That 2008 high was the peak of a bull market that started in mid-2003, although investors didn’t know it then. It was too good to last.

By 21 January, the mood changed dramatically and the BSE Sensex plummeted 7.4%—its biggest single-day decline ever—as concerns over a possible US recession overwhelmed the market.

There are 303 such wealth destroyer stocks, which have shed more than 90% of their value since then, and 219 of them are mere penny stocks now with the current price at Rs.10 or less, after a much-hyped past.

Then again, it isn’t all bad news. There are 469 stocks that have returned more than 100% in the same period.

The erosion in value was flagged on Twitter by stock trader Prashanth (@Prashanth_Krish), among others, on 16 June: “On the day Nifty hit its high for 2008, Koutons traded at Rs.1,000. Today, it trades at Rs.2.45.”

Market experts said most of the companies that have lost value are those that rode the wave but lacked sound fundamentals. While some had too much debt on their books, others lacked liquidity or a crisis engulfed them.

Investors said it was difficult to spot these stocks initially. But, over a period of time, piling debt and huge volumes without corresponding change in fundamentals were key to identifying such wealth destroyers.

“They were the most talked about stocks at the time—and investors felt they would miss out on the opportunity if they did not own them,” said Arun Kejriwal, director of Kejriwal Research and Investment Services.

“They featured in gainers, top volume-busters (lists)—they were everywhere, and investors got lured. Everyone was going ga-ga about them. The macroeconomic situation also looked robust, and there was a feel-good factor in the air” said Kejriwal.

Economic conditions in 2008 were quite different from those prevailing now. For the quarter ended September 2007, the Indian economy grew at 9.5%. On the other hand, India’s economic growth accelerated to 7.5% in the March 2015 quarter from a revised 6.6% in the three months ended December. Gross domestic product (GDP) growth for the whole year was reported at 7.3%, as against the earlier estimate of 7.4%. This year’s numbers and 2008’s are not comparable as the methodology for calculating GDP has changed.

In some cases, the market may just have expected too much of these companies.

“While some cases are about fraudulent intent or manipulation, in most cases the market simply misjudged their future,” said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd.

“(Investors) think of these companies as having a terrific business model, but it is actually broken. From sky-high expectations, you come down to very low hopes, and that is when investors’ wealth gets destroyed,” added Agrawal.

Agrawal cited the 1999-2000 dotcom boom that went bust later and the 2006-07 real estate story in this connection.

DLF is one of the stocks which saw an erosion of 90.04% in its market value since January 2008, with the stock price declining from Rs.1,150.60 toRs.114.65 on Monday.

The list comprises many other real estate stocks such as Unitech Ltd, which saw a 98.45% erosion in value in the same period and has turned into a penny stock. Shares ended at Rs.8.14 on Monday. Indiabulls Real Estate Ltd declined 92.94% in the same period to close at Rs.54.75 on Monday.

“Anybody who had huge land banks commanded an exorbitant premium, and investors deployed money without giving it much thought. That is where we saw a washout of around 90% in many such realty companies,” added Agrawal.

Another stock that hit skid row is FTIL. The stock is down around 93% toRs.157.20, mainly due to the payment crisis that hit its unit National Spot Exchange Ltd in 2013.

“Sometimes it’s not about the company. For example, there is a commodity boom bubble—you build expectations that it will continue—and it goes bust. Nothing wrong with the company here. Sometimes there are regulations or bans that hurt the company and in turn the price,” said Agrawal.

Indiabulls Real Estate declined to comment, while emails sent to DLF, Suzlon Energy, Reliance Communications, MMTC Ltd, Unitech, Housing Development and Infrastructure Ltd, Jaiprakash Associates, Aban Offshore Ltd, Moser Baer, Lanco Infratech Ltd and FTIL remained unanswered. Jai Corp Ltd could not be reached for a comment.

Retail and small investors, many dabbling in the stock market for the first time, are usually the first casualties.

“The ones who get trapped are often those who have less understanding of investing. People who practice investing and see that there is no strong business model to support high valuations can judge this relatively easily,” said Agrawal of Motilal Oswal.

What can sound alarm bells for investors over a period of time are: outrageously high P/E (price to earnings) multiples, valuations with no correlation to earnings, debt piling up with no relative pickup in operations or simply strong volumes with nothing changing fundamentally for the stock.

“Some scrips just see their market cap zooming to Rs.10,000 crore, and nothing has changed fundamentally. There is something to worry about,” said Agrawal.

Deven Choksey, managing director of KRChoksey Shares and Securities, a stockbroking firm, said while it was not always possible to identify such wealth destroyers, there were always some attributes which could flag caution.

“Some traits are always there. One needs to look closely at how capital is being allocated, whether they (management) are going on the right track or not. The philosophy of the management is another trait that can give some direction. If there is a lot of arrogance and no acceptance of reality, it is one of the signs to exit,” said Choksey

“When there are plans which look a little far-fetched, and (you get) that uncanny feeling that everything is done with an eye on the market—when you see these signs, you need to be not only cautious, but super cautious,” said Kejriwal.

Also, at times, institutional investors or a known high net-worth individual laps up a particular stock, leading others to follow suit and get trapped.

“By default, retail investors are trapped in these alongside institutions as well,” added Kejriwal.

[“source – livemint.com”]