If corp governance is an issue, sell your midcaps, even at a loss
Many investors have lost heavily on their midcap bets. Several prominent midcapstocks are down 60-90% in the last five years. For example, EducompBSE 0.33 % is down from Rs 757 to Rs 66, HDILBSE -3.47 %is down from Rs 540 to Rs 48, SKS MicrofinanceBSE -1.80 % is down from Rs 1,000 to Rs 127, BhelBSE 2.62 % is down from Rs 550 to Rs 176 and Crompton GreavesBSE -0.27 % is down from its peak of Rs 300 to Rs 91.
Naturally, investors are worried, especially after the recent carnage in the market. Most of the investors are asking themselves whether they should get out of these stocks even at a loss or should remain invested and buy more, given the steep fall in some of these stocks.
"Investors would have to divide such stocks into two categories. Where there are issues of corporate governance, it is best to book a loss and move ahead. However, if the business is genuine, and the stock is down due to restructuring, high interest costs or margin pressures, you should hold on or even add to your investments with a three to four year outlook," says P Phani Shekhar,fund manager - PMS, Angel Broking.
POOR CORPORATE GOVERNANCE
Many stocks have simply crashed due to poor corporate governance and a high percentage of the promoter holding being pledged. Take the case of HDIL, where investors are upset ever since the promoter sold his own shares to finance a piece of land. Not only this, as of December 2012, 96% of the promoter's holding is pledged, troubling investors even more.
Similarly, in the case of KS Oils there were reports of promoters accused of evading taxes. The entire promoter holding is pledged. The stock fell from Rs 84 to Rs 3 in the last five year. Similarly, the Central Bureau of Investigation (CBI) arrested P Kishore, managing director ofEveronn EducationBSE 0.00 % on charges of bribing an income tax official.
According to media reports, Kishore has admitted to paying the bribe and trying to conceal an income of Rs 110 crore. The stock is down from Rs 655 to Rs 60 now. Despite a change in the management, the stock has failed to recover.
Naturally, investors are worried, especially after the recent carnage in the market. Most of the investors are asking themselves whether they should get out of these stocks even at a loss or should remain invested and buy more, given the steep fall in some of these stocks.
"Investors would have to divide such stocks into two categories. Where there are issues of corporate governance, it is best to book a loss and move ahead. However, if the business is genuine, and the stock is down due to restructuring, high interest costs or margin pressures, you should hold on or even add to your investments with a three to four year outlook," says P Phani Shekhar,fund manager - PMS, Angel Broking.
POOR CORPORATE GOVERNANCE
Many stocks have simply crashed due to poor corporate governance and a high percentage of the promoter holding being pledged. Take the case of HDIL, where investors are upset ever since the promoter sold his own shares to finance a piece of land. Not only this, as of December 2012, 96% of the promoter's holding is pledged, troubling investors even more.
Similarly, in the case of KS Oils there were reports of promoters accused of evading taxes. The entire promoter holding is pledged. The stock fell from Rs 84 to Rs 3 in the last five year. Similarly, the Central Bureau of Investigation (CBI) arrested P Kishore, managing director ofEveronn EducationBSE 0.00 % on charges of bribing an income tax official.
According to media reports, Kishore has admitted to paying the bribe and trying to conceal an income of Rs 110 crore. The stock is down from Rs 655 to Rs 60 now. Despite a change in the management, the stock has failed to recover.
"Poor corporate governance shows that promoters' intentions are not genuine and they do not intend to reward shareholders. This will not work for investors and irrespective of the price they bought, they should just sell and book a loss," says Alok Churiwala, managing director, Churiwala Securities.
"In companies where more than 70-80% of the promoter holding is pledged, investors would be better off selling the stock. Past experiences show that the probability of such companies coming back to favour with investors is very low," says Jagannadham Thunuguntla, head of research at SMC Global Financial Services.
RESTRUCTURING WILL HELP
It is not that all beaten-down companies are bad. Many are going through a tough business environment, or may have overseas acquisitions which have not worked for them, or is in the midst of restructuring. Investors need to scan through such companies, and look at the chances of the company turning around and the management capability.
Experts believe investors should focus on such companies. "Investors should carefully choose companies where the business setback is temporary, and could revive in the coming quarters, and should be patient and not expect immediate results," says Alok Churiwala. Take the case of Crompton Greaves. The promoters have a sound reputation and clean image. The company was going through a bad patch as profitability was hit due to restructuring cost relating to an overseas project and difficult global markets.
However, the restructuring seems to be coming to an end and things should start looking up in a couple of quarters. "The company has introduced new, high-value products like new energy efficient motors. It has set up capacities in new markets like Brazil and Saudi Arabia. It has already put in place a global sourcing organisation with new sourcing office opened in Shanghai to improve sourcing," says Kunal Sheth, an analyst at Prabhudas Liladhar.
Moreover, the company has optimised its Belgium operations and shifted a large part of manufacturing to Hungary to take advantage of low cost structure and younger work force there. All these could improve margins in the coming year.
He advises investors to accumulate the stock at the current price of .`91 and has a target price of Rs 128. In short, investors can buy now and exit on rallies. "Given the changes happening in the company, investors with a two to three year outlook, could look at adding the stock at the current price," says Amit Agarwal, an independent analyst who runs investorzclub.com, a stock market blog.
"In companies where more than 70-80% of the promoter holding is pledged, investors would be better off selling the stock. Past experiences show that the probability of such companies coming back to favour with investors is very low," says Jagannadham Thunuguntla, head of research at SMC Global Financial Services.
RESTRUCTURING WILL HELP
It is not that all beaten-down companies are bad. Many are going through a tough business environment, or may have overseas acquisitions which have not worked for them, or is in the midst of restructuring. Investors need to scan through such companies, and look at the chances of the company turning around and the management capability.
Experts believe investors should focus on such companies. "Investors should carefully choose companies where the business setback is temporary, and could revive in the coming quarters, and should be patient and not expect immediate results," says Alok Churiwala. Take the case of Crompton Greaves. The promoters have a sound reputation and clean image. The company was going through a bad patch as profitability was hit due to restructuring cost relating to an overseas project and difficult global markets.
However, the restructuring seems to be coming to an end and things should start looking up in a couple of quarters. "The company has introduced new, high-value products like new energy efficient motors. It has set up capacities in new markets like Brazil and Saudi Arabia. It has already put in place a global sourcing organisation with new sourcing office opened in Shanghai to improve sourcing," says Kunal Sheth, an analyst at Prabhudas Liladhar.
Moreover, the company has optimised its Belgium operations and shifted a large part of manufacturing to Hungary to take advantage of low cost structure and younger work force there. All these could improve margins in the coming year.
He advises investors to accumulate the stock at the current price of .`91 and has a target price of Rs 128. In short, investors can buy now and exit on rallies. "Given the changes happening in the company, investors with a two to three year outlook, could look at adding the stock at the current price," says Amit Agarwal, an independent analyst who runs investorzclub.com, a stock market blog.
Source : http://economictimes.indiatimes.com
