All the stocks in the K-10 index cannot be viewed in the same light. Some have shown an exemplary business performance, while others have seen their best-laid plans fall through.
Ketan Parekh. The broker whose "dubious dealings" managed to send the Indian stock markets into an agonising tailspin not so long ago. Partly in reaction to the scam, investors fled the technology sector in droves, leaving behind a market shrouded in gloom. Twelve months on, little seems to have changed. The equity markets continue to limp along, still bearing the faint scars of the scam.
Ketan's ten favourite stocks ("K-10" for marketmen), have also been on a downward spiral ever since; they've underperformed the overall market by a huge margin. For the year ending February 28, 2002, the K-10 stocks, on average, have shed about 51.67 per cent of their value, compared with a 16 per cent erosion in the benchmark BSE Sensex.
From their dizzy heights in February 2000, these stocks (barring pharmaceutical stock Ranbaxy which lost only 14 per cent) have surrendered between 70 and 98 per cent of their value. In contrast, the Sensex has fallen 34 per cent in the same period. Together, they've erased over Rs 14,000 crore in market capitalisation over the past one year and over Rs 1,45,000 crore from their peak values.
Undoubtedly, the association with Ketan Parekh brought in a heavy dose of bad publicity for these stocks and turned them into outcasts among the investing community. It was an ironic situation, because at one time, many of these stocks had enjoyed tremendous support from large institutions; after the scam, it seemed no one wanted to mention their names.
In fact, fund houses and foreign institutional investors wasted little time in shoving these stocks out of their portfolios. Consider these numbers: In fiscal 2001, foreign and domestic institutions held around 30 per cent in telecom company GTL. That's been pared to around 15 per cent. On the other hand, public shareholding has climbed dramatically to 40 per cent from 20 per cent.
And what about the companies themselves? Have they fretted about their share prices at all? While some companies still remained unperturbed, with other the answer was a resounding yes.
The ones who fell in the "unconcerned about the stock price" list were DSQ Software and Pentamedia Graphics -- in both cases, the promoters had sold a large portion of their stakes in the companies, showing clearly their lack of interest in driving the company ahead. For them, the market had presented an opportunity to earn some easy money -- and they has simply grabbed it.
But in instances where the promoters still held a significant share of the equity, there was definite concern about the prospects of wealth creation for themselves and their shareholders.
Having said that, most of them have reconciled to the fact that it will take time before the coloured market perceptions towards these stocks undergo any change. Indeed, investors in these stocks appear to have completely lost faith in what company managements have to say about future growth and performance. Says an official at GTL: "Even if we had conducted analyst meetings, anything the company said would have been interpreted negatively."
A reason why most of these firms, mired in controversy, decided to stop all interactive sessions with the press and investors.
The Smart Investor met up with some of these "scam-tainted" companies to find out their state a year on. Two companies in particular, Himachal Futuristic and GTL - the two companies associated the most with the broker's dealings - broke their silence to tell us in detail about their performance.
In the world of stock investing, business performance is considered the most significant engine for driving stock prices higher. The quality of management comes a close second. Conventional wisdom says that financial markets always reward earnings, especially if there is faith that they are sustainable. Unfortunately, it's this very faith that companies seem to have lost completely.
The abysmally low price-earnings ratios of some companies indicate that investors remain wary, and in many cases, extremely bearish about future prospects. For instance, shares of Chennai-based animation company, Pentamedia Graphics, trade at a trailing 12-months earnings multiple of 2.44. GTL trades at a PE ratio of 4.41.
Many of these companies, barring Ranbaxy and Aftek Infosys, have fared badly in previous quarters. While some posted a negative growth in earnings, others simply failed to live up to their promises.
To some extent, the blame does lie at the doorstep of the general slowdown in the US and the September 11 terror attacks. The victims here have been Satyam, SSI and GTL: all of them witnessed a rapid deterioration in their fundamentals. GTL saw its business calculations go awry when the e-business lost its charm, after the dotcom bust. The company is now re-organising its business in favour of network engineering.
But this explanation doesn't hold water in all cases. For instance, Zee Telefilms hasn't been able to deliver the kind of growth it had envisaged two years ago.
On the other hand, if there was one K10 stock that kept its head above water, it was Ranbaxy. The stock gained 19 per cent in the past twelve months. A strong surge in exports helped the pharma major record a steady growth in profits. And only one "K-10" company bettered on its promises: Aftek Infosys. This Mumbai-based software product company showed good progress on the business front this fiscal.
One element that turned out to be a common feature for most of these companies, was the problem of plenty. Many of them were able to strike private placement deals at very high prices, vesting them with more cash than they probably could have handled. For the amount of money they had, there were very few opportunities to exploit.
In a nutshell, it's not really fair to paint all these companies with the same brush. It's noteworthy, that even the degree of confidence investors have about these companies differs. That's evident from studying the movements of the stock prices in the past year. While shares of Aftek Infosys fell only 17 per cent, others such as DSQ Software and HFCL fell 89 per cent each.
The only way these companies can now win back shattered confidence is by working harder to get their house in order and logging in strong earnings numbers. Here is a look at the business and stock performance and outlook for the "K-10" companies.
Aftek Infosys
This company managed to post an impressive performance despite a US slowdown. It not only met its targets, it bettered them. Apparently, the company's product-based business strategy has worked well.
Currently, Aftek has one product in the market, with another in the pipeline. The "Gold Certification" for its UPS management product, Powersafe Uniter, from international networking major Computer Associates (CA) has enabled the company to speedily ramp up revenues from the products business. It's co-marketing deal with CA for this product has been a shot in the arm for the company.
In addition to getting access to CA's dealer network across the world, the company has also set-up a wholly-owned subsidiary to promote its products. It plans to invest $3 million (Rs 14.4 crore) in this subsidiary, with The Enterprise Network (TEN), a NASA-AMES funded Technology organisation, expected to provide venture funding.
Also expected to hit the Japanese technology shelves is "Jadoogar", a networking product based on bluetooth technology. The company is also bidding for a smart card project, based on embedded technology, for state-owned public transporter Bombay Electrical and Suburban Transport (BEST).
Business outlook : The successful implementation of the proposed BEST project should provide recognition for its smart card products. Still, the Rs 25 crore project, which will be spread over 12 years, does carry some inherent risks. The company is negotiating for a revenue-sharing arrangement with international majors for its "palm 7" integration product called Bridge. But, analysts remain skeptical about Aftek
