NEW DELHI: With equity benchmarks Sensex and Nifty taking a U-turn in the second half of 2018, the club of penny stocks has swelled fast.
Several prominent companies wrestling with large debt piles, corporate governance issues or sectoral headwinds have fallen to mouth-watering price levels, luring gullible investors to lap up these shares.
But analysts caution against such misadventures, as very few of these names can stage a rebound when the market revives and even then they will see major selloff by investors, who have got stuck in the mayhem.
The number of stocks in the basket, loosely defined as the ones priced below Rs 10, has risen 41 per cent to 662 year-to-date from 469 at the beginning of the year.
The selloff has been so intense on these counters that 88 of these stocks have become microcaps from smallcaps and 64 per cent of investor wealth has got wiped out.
These 662 stocks together lost 64 per cent of market value year-to-date compared with a 30 per cent plunge in the smallcap index, 22 per cent fall in the midcap and 4 per cent drop in the BSE Sensex in this period.
The BSE Sensex was rising at break-neck speed till August end, but witnessed a reversal from September amid the NBFC liquidity crisis, spike in oil price and global geopolitical tensions.
“When stocks fall hard, more than the general market, the element of unsystematic risk in the market is usually greater than systematic risk. Otherwise, there is no reason why any stock should fall more than the smallcap index,” said Jimeet Modi, Founder & CEO at SAMCO Securities.
Among prominent names in the penny club are Suzlon Energy, United Bank of India, Jaiprakash Associates, Bajaj Hindusthan Sugar, GVK Power & Infrastructure, Jaiprakash Power Ventures, Tata Teleservices (Maharashtra), Ballarpur Industries, Siti Networks, Nagarjuna Fertilizers and Chemicals and 3I Infotech, among others.
Smallcap to microcap
Gitanjali Gems today quotes a Rs 17 crore m-cap against Rs 810 crore market value it had commanded at the end of 2017, down 98 per cent. The company is promoted by Mehul Choksi, a key accused in the multi-crore PNB scam.
Venugopal Dhoots Videocon has seen its market value fall below Rs 100 crore from Rs 660 odd crore at the end of 2017. Videocon has piled up huge debt and was also in the news for alleged quid pro quo deals with ICICI Bank CEO & MD Chanda Kochhar in getting Rs 3,250 crore loans.
Among others, Arcotech, Diamond Power Infrastructure, JVL Agro Industries, Madhucon Projects and Lakshmi Energy & Foods are some of the smallcaps whose market capitalisations have fallen below Rs 100 crore.
NCLT, stressed firms on the list
Many of the companies dragged to the National Company Law Tribunal (NCLT) for insolvency proceedings have turned penny. Shares of Kwality, which traded at Rs 113 a piece (m-cap Rs 2,689 crore) at the end of 2017 are down 93 per cent to Rs 7.6 apiece (m-cap 183.40 crore). Omkar Speciality Chemicals now trades at Rs 9.2 a piece against Rs 73.6 at the end of 2017, down 88 per cent YTD.
Stocks of companies facing financial stress such as IL&FS Investment Managers or the ones with negative triggers such as Parsvnath Developers, which is seeing forensic audit on prima facie suspicion of misrepresentation of business with regard to certain transactions, too have performed horribly.
The two stocks trades at Rs 7 each, down nearly 77 per cent from Rs 31-32 apiece as of December-end.
Others like Suzlon Energy, Ansal Housing & Construction, Jaiprakash Associates, Siti Networks, Ujaas Energy Punj Lloyd, United Bank, Gokul Refoils and Solvent, Sri Adhikari Brothers Television Network, Nagarjuna Fertilizers and Chemicals Visa Steel, Ruchi Soya Industries, GVK Power & Infrastructure have lost up to 80 per cent in the recent fall.
Half of stocks hit 52-week lows in October
About 341 of the 662 stocks have hit their 52-week lows this month. Jaiprakash Power Ventures, Ballarpur Industries, Siti Networks, 3I Infotech Greencrest Financial Services Parsvnath Developers, Lloyd Kwality Ruchi Soya Industries PIL Italtca Lifestyle, JMT Auto, Gokul Refoils and Solvent
Indosolar, Consolidated Construction Consortium and Sathavahana Ispat are a few penny stocks which hit their 52-week lows on Thursday.
Case for value hunting?
The probability of penny stock becoming multibagger is 1 in 1,000 and, thus, it is a matter of luck to get one in the portfolio, said Jimeet Modi of SAMCO Securities.
“It is better to avoid such beaten-down stocks as whenever a bull market emerges, these stocks will lag as there will be sellers on every rise," he said.