The trend is similar to the frenzy seen during the dotcom boom of 2000, which saw many companies in the sector rally at unusually high levels of speculative activity. A decade later, shares of mining, trading or export companies were targeted by operators. Many small investors were tempted to invest in penny stocks in large numbers so that their hard earned money could be snatched away by smart operators, at times colluding with unscrupulous promoters.
It seems that the current bullish phase is no exception to the suffering trend prevailing among small gullible investors. There are signs that they are chasing penny stocks of fundamentally weak companies, putting their investments at risk.
An analysis of trading patterns in the current market reveals that the share prices of many lesser-known or unknown companies have reached unprecedented levels, even though their fundamentals hardly inspire any confidence. Several such examples are included in the list of stocks that are touching 52-week highs in a row BSE. However, the unusual gains have prompted exchanges to keep some of them under watch, prompting investors with caution.
It is pertinent to mention here that none of the companies covered in this article have so far been subjected to any major regulatory scrutiny for the trading patterns observed in their shares. Sharp profits may be the result of normal business practice without the possibility of any misappropriation by related companies or unrelated entities. Certain possibilities such as restructuring of operations, reduction in capital, change in management, change expectations could be triggers behind the uptick in valuations.
While these triggers may have their own merits, they hardly justify the precariously high valuations in some cases.
One in the pack of penny-turned-multi-bagger stock is Adinath Textiles, which BSE classifies as a textile company. The stock surged to a 52-week high of Rs 101.7 on September 29, 2021, which translates to over 100x returns as compared to its 52-week low of Rs 1.24 on November 18, 2020. Now let’s look at the fundamentals of the company. The figures are far from impressive; It has reported absolutely no sales for the last two consecutive financial years and the June quarter of this year. He could claim only one other income and net profit.
According to BSE data, Adinath Textiles made a net profit of Rs 32 lakh on other income of Rs 1.7 crore for the financial year 2020-21. With figures of Rs 23 lakh and Rs 54 lakh respectively for the quarter ended June 30, 2021, this year’s performance is nothing significant to write home about. These figures are hardly attested to the multi-bagger position of the stock, which is currently quoted on the BSE at an exceptional PE (price/earnings ratio) of 134 times. BSE has classified Adinath Textiles as a ‘GSM: Stage 2’ company as per SEBI’s Graded Surveillance Measures (GSM) aimed at encouraging investors to be extra cautious while transacting in shares of companies under surveillance. To be alert.
Bombay Wire Ropes is another high PE company, which has been sold without credit. Classified as an iron and steel products company by BSE, its shares hit a 52-week high of Rs 70.90 on September 29, 2021, more than nine months from its 52-week low of Rs 1.98 recorded in January. grew 36 times in a short time. 8, 2021. Given the company’s poor fundamentals, such a huge return seems unrealistic. With a PE multiplier of 1,336 times, the current valuation appears to be too high for a very small company. Bombay Wire Ropes reported a net profit of Rs 15 lakh on other income of Rs 45 lakh for the financial year 2020-21. As per BSE records, it has an equity capital of Rs 53 lakh, of which 64 per cent is with promoters. Bombay Wire Ropes is also classified as “GST-Stage 2” stock.
Proceed India is another example of a multi-bagger stock where the company has not reported consistent sales for the past several quarters. However, the IT software products company posted a net profit of Rs 12.7 crore during the year ended March 31, 2021, on account of some exceptional earnings reported to BSE. The stock has breached the 5 per cent upper circuit limit of Rs 103.35 on September 30, 2021, a return of 382 times in less than a year. The company has gone through the corporate insolvency process under the Insolvency and Bankruptcy Code, as part of which the NCLT recently approved its resolution plan. Accordingly, its equity capital has come down from Rs 9.61 crore to Rs 31 lakh. Proceed India is classified as an ‘IRP: Stage 2’ Company on the BSE website.
These few companies represent a large universe of penny-made multibagger stocks, which are thriving amid extremely positive sentiment on the exchanges. Investing in such stocks can put retail investors at risk of losing capital if they are heavily manipulated. In fact, investors have already begun to bear the brunt of their mindless decisions, as evidenced by the volatility in share prices over the past few days of the bearish market.
According to the BSE website, Adinath Textiles has been trading on the lower circuit of 5 per cent over the counter for the past two days without any buyers, while trading in Bombay Wire Ropes is prohibited from September 30, 2021, as part of the GSM action.
Shares of fundamentally weak companies are generally classified as T and Z group on BSE. Grouping is done on certain qualitative and quantitative parameters. The T group comprises stocks decided on a business-to-business basis as a monitoring measure, while the Z group comprises companies that have failed to comply with the BSE listing requirements and mandatory regulatory compliance. T and Z Group stocks are subject to strict monitoring measures.
Their intra-day movement is mostly limited to a 5 percent circuit filter, which is the maximum limit within which the stock price can move up or down in a day. In addition, investors are required to take mandatory delivery of shares under the 5 per cent circuit filter and no intra-day squaring of positions is allowed.
This makes it difficult for small investors to exit when an operator in a highly manipulated stock goes on a selling spree after the price has risen to a certain level. In the absence of buyers, the stock price keeps hitting the lower circuit continuously for several days, causing huge losses to the trapped investors.
There have been many cases where the stock exchanges have not followed the rules and regulations related to insider trading, mandatory compliance related to filing of quarterly results, audited accounts and shareholding pattern, listing charges etc. The defaulters among such companies have shown a tendency not to oblige, resulting in an indefinite suspension of business and loss of entire capital for investors. This should act as a deterrent for potential investors against taking unwanted calls in the current market.
(Vijay Gurav is a freelance market writer. Views are his own.)