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Wednesday, April 8, 2009

Operators paradise-Investors nightmare

As usual went through impresive notes of hemant guptajis.Heres the same for you folks.

1)Scripscan:Sterling Biotech Ltd
Traded in:Nse-bse

Story:Sterling is mainly in the business of manufacturing gelatin. For the nine months ended December 2008, it reported revenues of Rs847 crore and profit before depreciation and taxes of Rs260 crore. According to sources in the industry, such high profit margins – higher than those of many software companies – are rather unusual. The promoters hold around 39% of the equity, only a small fraction of which is held in personal names. Moreover, excluding Bank of New York, seven entities hold nearly 23% stake in the non-promoter category. The promoters have pledged nearly 14% of their holdings and raised around Rs400 crore. The market rumour is that, around 30 months ago, the promoters pledged some shares with Merrill Lynch and raised Rs240 crore to be repaid in one year. Apparently, the promoters have also pledged 4.38% with Kotak and 4.30% with JM Financial.According to some Vadodara-based brokers, if the pledged shares start getting sold, the share price may crash. For reasons best known to the NSE authorities, the Sterling stock figures in the derivatives segment.

2)Scripscan:Sterling International Enterprises Ltd
Traded in:bse

Story:It is easy to miss the fact that the face value of the scrip of this group company of Sterling Biotech is Re1. This means that the share price is Rs1900 on the face value of Rs10. For the year-ended June 2008, SIE’s Indian operations had a total income of Rs20.16 crore with a net profit of Rs5.49 crore. Employee cost stood at Rs6.30 crore. This company has floated the following overseas subsidiaries: British Oil & Gas Exploration Pvt Ltd (Mauritius) and British Oil Resources (Mauritius); British Oil & Gas Exploration Pvt Ltd (British Virgin Islands); Sterling Oil Resources and Geodynamic Geospectra Ltd. SIE isreporting ‘international trading’ in these subsidiaries. For the year- ended June 2008, its consolidated income was Rs201 crore and PAT was Rs52.46 crore. Consolidated employee cost was Rs8.94 crore. This means that the company has earned an income of Rs181 crore and a profit of Rs47 crore from its overseas operations. Global trading companies of the US and Japan have profit margins of just 2%-3%. And, an Indian company, called Sterling International, has 25% profit margin! For Indian operations, employee cost worked out to 30% of sales. For overseas operations, employee cost was just 1.50%. The profit figures are too good to be true. Even if profit figures were taken on their face value, the scrip has a PE of 77 which even the bluest of blue chips don’t enjoy. Daily trading volumes are 1.50 lakh-3 lakh shares but delivery ratio is only 0.50%–2%. This clearly shows that vested interests are creating intra-day volumes to sustain the share price. If the government imposes income tax on exports and overseas profits, several companies will cease their overseas operations. Many promoters succeed in showing bogus operations only because they don’t have to pay income tax.

3)Scripscan:Bang Overseas Ltd
Traded in:Nse-bse

Story:For 2007-08, its EPS was Rs9 and, at one time, the scrip was sporting a PE of 32. Half its turnover comes from trading. For the December 2008 quarter, the total turnover was Rs31 crore of which trading turnover was Rs22 crore and it made a loss of Rs43 lakh. The market information is that the same group of operators, who had rigged SEL Manufacturing earlier, is now involved.

4)Scripscan:Hester Bioscience Ltd
Traded in:Nse-bse

Story:The company is in the business of chicken vaccines. About two years ago, it had made a rights issue to fund its capacity expansion by four times which gave an impression that there is a huge demand for its products. However, its sales continue to languish. It achieved revenues of Rs32 crore in 2007-08. For nine months ended December 2008, sales were just Rs22 crore. Instead of increasing, sales decreased in the current year indicating that the company may be barely using its existing capacity. So what were the funds raised for? Was the cost of capacity expansion justified?

5)Scripscan:EdServ Softsystems Ltd
Traded in:Nse-bse

Story:How did this company make its IPO at Rs60 in February 2009, at a time when even larger well-established companies postponed their IPO plans due to the extremely poor market conditions? Well, in the past, companies have got their IPOs subscribed by colluding with Gujarat-based operators who take 30%-40% discount on IPO prices through cash kickbacks. On the first day of listing, when the Sensex was down nearly 300 points, EdServ was ramped up from a low of Rs55 to Rs138. From the next day, it started hitting the lower circuit. The company has 1.20 crore shares of which the promoters hold 60%. This means that the free float cannot be more than 48 lakh shares. However, on the listing day, some seven crore shares of EdServ were traded on the BSE and the NSE, a turnover of nearly Rs800 crore with a delivery ratio of just 3%. The share price was manipulated through circular trading spread over more than 100 trading terminals. Still, the BSE did not put this scrip in ‘T’ category. If delivery is made compulsory, operators of circular trading will go out of business. But the Exchange and the regulator are turning a Nelson’s eye to the blatant games of operators and promoters.

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