Small price stocks in the share market

I am writing this article on the penny stocks/ low priced shares which are advertised to us by some leading researchers, social-media, financial bloggers etc to give very high returns in a short span of time beyond any normal financial expert belief. Penny stocks are low priced, low market capitalisation, mostly illiquid and hence become difficult to trade but they give high returns which one cannot even imagine. It fits that high risk (beta) gives higher return. I have decided to take example of top 2companies that comes in my mind in which many investors invested their hard-earned money thinking about them as the next Rockstar share of stock market only to realise later the trouble they have got themselves into.

A. Alok Industries Limited

(Image Source - www.moneycontrol.com)

i. Alok Industries Limited ('Alok Industries' or 'the company') is engaged in textile manufacturing with presence in cotton and polyester segments. Not going too deep into the past of the company, it was in neck-deep trouble with a mountain of debt, falling turnover, huge losses, negative cashflows and was struggling to even repay the interest component of debts. The company was dragged to court by its creditors under Insolvency & Bankruptcy Code. But the company fortune changed when it was acquired during the insolvency proceeding by the highest bidder, Reliance Industries Limited ('RIL') along with JM Financial Asset Reconstruction Company. RIL currently holds 37.7% stake in Alok Industries as per the shareholding pattern of 31.3.2020 of the company.

ii. As the whole of the world including India gripped into the pandemic of Covid-19, which further lead to the downward spiral of India's economy, there were few companies which turned this havoc situation into a golden ticket for their business. RIL decided to use the manufacturing capacities of Alok Industries in Silvassa, Gujarat to exclusively manufacturing Personal Protective Equipment ('PPE kits) for front line medical professionals and others bringing down the cost of such PPE kits to INR 650 per kit from INR 2,000 imported kits cost.

iii. This news of PPE kits manufacturing along with various other positive significant factors such as RIL backing etc had a very strong impact on the share price of Alok Industries, investors started looking at this stock as the next multi-bagger stock, The share price of the company zoomed from INR 4.50 on 07.04.2020 to a high INR 58.5 on 03.07.2020, a return of around 12 times the amount invested in a period fewer than 4 months.

(Technical Chart Alok Industries Ltd Source - www.moneycontrol.com)

iv. The whole sharemarket was in red and falling every single day to a new low during the lockdown period, share market declined by nearly 40% from its high in January 2020. This looked very similar to the Indian stock market crash of 2008-09 and the after-effects. But, Alok Industries was an exception to the above scenario as the share price used to open with regular upper circuits on a daily basis during the period. Even after the Unlock 1.0, where Sensex and Nifty recovered nearly 40% from its March 2020 lows, the movement remained bullish for Alok Industries where more and more investors tried their best to get hold of this share and use this opportunity to book high gains.

v. But this dream run came crashing down after 03.07.2020 when a notice was received by the company from stock exchanges NSE and BSE and exchange sought clarifications with reference to movements in volume. The share price turned downwards thereafter with the lower circuit, high sell orders at a low price and very few buyers. The company is also under the lens of SEBI due to its high upwards price movement but no formal action has been taken. This is the dark side of trading in stock market where we are shown how a share gives a high stock return of 12 times but no one talks about those investors who are now stuck as they cannot sell shares due to low or no buyers and they will bear a daily loss of 4-5%(approx.) due to lower circuit till some good news comes.

vi. This also teaches a very valuable lesson to investors where we buy shares only on the basis of news, market influencers, high price movement and volume etc, ignoring the basic fundamental details of the company. Alok Industries has improved from its past in many factors such as better corporate governance, strong backing of RIL, new business opportunities etc but still, this cannot be justified till the real numbers are declared by the company. The high valuation where it stands today needs to be justified with good results which are still to be declared. The company still has high interest cost and debts, low promoter holding, high promoter pledging of shares, pending regulatory investigation etc.

vii. The company has still not filed its audited Quarterly results for 31.03.2020 (Q4) till date, but many investors are still being optimistic that numbers will be much better than past clearly depending on their own luck or gut feeling and clearly ignoring the basic fundamental rule of investing. I hope this lesson has taught many to not enter into such share and even if they do enter, they should invest fairly small amounts that even if lost will not impact them majorly or they will risk of burning their own hands.

(Consolidate Quarterly Results Alok Industries Ltd Source - www.moneycontrol.com)

B. Ruchi Soya Industries Limited

(Image Source - www.moneycontrol.com)

i. Ruchi Soya Industries Limited ('Ruchi Soya' or 'the company') is engaged primarily in the business of processing of oil-seeds and refining of crude oil for edible use. The Company also produces oil meal, food products from soya and valueadded products from downstream and upstream processing. The company has been in newsregularly from the time it was acquired by Yoga guru Baba Ramdev's Patanjali Ayurved, through an insolvency process. The company shareholders earlier after resolution process under IBC code got only 1 share in new company for every 100 shares held earlierAs on March 31, 2020, the shareholding data pattern shows that promoters (Patanjali Group) held 99.03%, the public shareholders held 0.97%, of which, individual shareholders held 0.82%, in the company.

ii. The company share was again listed on stock exchange on 27.01.2020 at INR 16.5 and has not looked back ever since with continuous increase in the share price. The current Covid 19 pandemic,lockdown woes, falling economy,market etc also could not stop the increase in share price. The company share price even reached an all time high on 26.06.2020 of INR 1,519.65 (NSE price). available and low volume trade of this share. The gain here is around by 91.1 fold the amount initially invested and that also in a span of 5 months. This shows the power of share market in which anything can happen anytime.

iii. The company during this time rose its market capitalisation ('market cap') up to INR 45,000 Cr, entering into the list of top-100 most valued companies in terms of market cap in mid-cap segment. The company also stood ahead of many others companies in terms of market cap such as telecom services provider Vodafone Idea, tyre manufacturer MRF, state-owned mining company NMDC, liquor maker United Breweries and insurance company General Insurance Corporation of India. The company overtake its edible oil segment competitor Marico Ltd, in terms market cap on 26.06.2020 with the market-cap of Rs 45,592 crore, the company surpassed packaged foods, Marico Ltd., Rs 44,489 crore. Before trading in its shares was discontinued last November, Ruchi Soya's market cap amounted to just 0.23% of Marico's.

(Technical Chart Ruchi Soya Industries Ltd Source - www.moneycontrol.com)

iv. The share price of the company took a dive with a trend of regular lower circuits after the declaration of its audited Q4 results for year ended 31.03.2020 on 26.06.20, the company posted a standalone turnover at 3,190.96 Crores and posted loss of around 41.25 Cr. Before declaration of results many investors tried to grab this opportunity with both hands, for some investors it did work as they exited before the fall but many investor are still stuck in this share only to realise that the profit they were daily recording due to soaring increase in gain on share prices were actually mere book profits, as when the bubble burst they were left in lurch and could not realise any gain due to no buyers of these shares. The company share now is only opening with new lower circuit prices every day.

v. Just like Alok Industries, many investors wanted to buy this share but as the major share holding of company is still held with promoters, the volume of shares free available to trade to public are also very low. The company was also widely criticised due to its high movement in price with still the majority holding held with promoters clearly indicating that something is fishy, as the free shares are held only by 0.97%, which does not reflect true value of the share. Further, as per the current SEBI LODR, after the resolution process the non-promoter holding (public shares) should be increased to 10% in 18 months and further to 25% in thirtysix months time frame. This clears the image as the promoter Patanjali Group will in future get to sell and reduce stake in company by selling shares at a much higher price than they were originally allotted to them.

vi. Some investors have blindly invested in shares of the company on speculating news of reverse merger of Patanjali, so that Patanjali can be listed on stock exchange, but that news appears to be totally false as no such statements have been given by both the companies. Further, investors did not see that financially also the company is not doing that great during the lockdown period and afterwards due to less capacity utilisation at its plants, unavailability of labour and transportation as well as procurement of packing materials. The company is trading under trade-to-trade or ‘T' segment, where shares can be traded only for compulsory delivery basis. It means trade-to-trade shares cannot be traded intra-day. Each share purchased/sold, which are parts of this segment, needs to be delivered by paying full amount.

vii. Securities and Exchange Board of India should take strict action against such companies because, in this instance, the extremely low volume of freely traded public shares and majorly controlled by single group has led to strange price movements. Till date, only small clarifications have taken place but no strict actions have been taken till date. SEBI need to formulate a strict policy against such companies as this hampers the trust of investor in regulators of market. There are still many investors who are facing daily losses of 4-5% due to lower circuits everyday till any volume of shares movement comes.

(Standalone Quarterly Results Ruchi Soya Industries Ltd)

DISCLAIMER: This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.

AUTHOR: Rishabh Sharma (CA Final Student, pursuing CFA, Finance and stock market enthusiast& new blogger)