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Thursday, February 26, 2009

Operator"s paradise

Was reading guptaji"s impresive notes on some small counters.Lets share it with you folks.

1)Scripscan:Winsome Textile Industries Ltd

Story:This Chandigarh-based textile company makes synthetic/cotton yarn, an industry which is doing very badly now. On a gross block of Rs219 crore, the company has a debt of Rs180 crore, more than its annual turnover. In the first half of the year, it has already paid Rs7.5 crore as interest charges and has reported a loss of Rs3.75crore for the period. Annual interest liability may touch around Rs16 crore. How, and for how long, will a loss-making company service such a huge debt? However, inexplicable are the ways of operators. The scrip had touched a low of Rs11 on December 2008 but a Mumbai-based operator started mopping up the shares and the price has already trebled at a time when mighty promoters are biting the dust.

2)Scripscan:Aurionpro Solutions Ltd

Story:Despite good financial results, the share price has crashed from a high of Rs520 to Rs78. The reasons are not far to seek. The company has secured loans of Rs48 crore and unsecured loans of Rs5.43 crore. On the other side, there are unsecured loans/advances of Rs22 crore, Rs14 crore of which are supposed to be recovered in cash or kind. Why would a company have a secured borrowing for unsecured lending? Further, it has invested Rs68 crore in an international subsidiary which is supposed to do some analytics software business. Only time will tell how this business does and whether the shareholders gain from this investment.

3)Scripscan:RTS Power Corporation Ltd

Story:This is a small Kolkata-based company making transformers. At a time when well-established, much bigger and much older companies in this industry are going abegging at a PE ratio of 5-8, RTS is trading at 54x its FY08 EPS of Rs3. In the past, the Company had made big announcements about setting up a new transformer factory and also foray into the business of producing cables and conductors, although its turnover has not gone up significantly. A Mumbai (Borivali)-based operator is involved in ramping up the scrip; this operator is believed to be an expert in selling promoters holdings at a high price. He normally borrows a few lakh shares from the promoter and does circular trading on 15-20 terminals spread over different locations. Investors get tempted by huge volumes. They assume that some big news is on the way. However, investors do not look at the delivery ratio. Daily traded volumes in RTS have zoomed to two lakh shares but delivery ratios are abysmally low at 3%-5% which clearly indicates that scrip is being ramped up. Surprisingly, BSE has so far not put this scrip in T Category, while many scrips are transferred to T even when volumes may be 30,000-40,000 to shares. As on 31 March 2008, promoters stake came down 5%. Investors are advised not to believe any rumours and refrain from buying this scrip.

4)Scripscan:Maharashtra Polybutenes Ltd

Story:This company is a classic case of how promoters can misuse provisions of rehabilitation package. MPL makes polybutenes supplied to oil companies like BPCL and HPCL. This industry has not done too well so far and is unlikely to do any better in future. This is because polybutene manufacturers hands are tied. The customers are so big that they dictate the price and other terms. Similarly, the few suppliers of raw material are so big that they dictate terms of supply to polybutene manufacturers. MPL has a terrible track record partly due to its inefficiencies and partly due to poor management quality. No wonder, in the last six quarters, its aggregate performance led to losses. Its equity capital was Rs15.59 crore and when the Board for Industrial and Financial Reconstruction approved a 95% reduction in equity capital, it provided an opportunity to rig up the share price as most minority shareholders would be left with tiny quantities or fractions that cannot be sold. Its share price was Rs3 in March 2008. In a year when share prices have been crashing, MPL share price is nearly 1,600% up. Stories are circulating in the market that the companys land is worth a lot, although it does not have any surplus land. Operators are also spreading the word that giant oil companies are its customers. True, but then the full year of sales of MPL is less than one days sales of companies like BPCL and HPCL. Well, soon a toilet-paper supplier can claim that Vodafone is his client. Incredible, that the Mumbai-based operator is even trying to convince some portfolio managers about the investment-worthiness of MPL. Some of them may even fall for it.

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