Investing in stocks by its very nature is a flat ride. Shares do not always line up.
But, if the stock is of good quality, it will eventually recover and give good returns in the long run.
However, if it does not, you may be trapped in a value trap.
Basically weak stocks and corporate governance issues, suspicious related party transactions or investing in stocks with high debt can cause unparalleled damage.
In today’s article, we will take a look at the popular stocks that have largely defunct and turned into penny stocks, i.e. went from ‘multiplebackers to multibackers’.
# 1 Unitech
Talking about wealth destroying stocks belonging to the real estate sector takes place in our minds.
One of them is Market 2007 Darling Unitech.
Unitech was India’s largest listed real estate company in 2007. During the 2003-08 real estate boom, Unitech was one of its poster mats. Its advertisers Chandraks are India’s second richest developers after DLF’s Kushal Pal Singh.
In the mid-2000s, as the real estate sector was at its peak, many developers expanded their operations to other parts of the country. Unitech is one of them.
In 2007-2008, Unitech Wireless, a subsidiary of Unitech, spent Rs. 16.6 billion and won by applying for a 2G telecommunications license. Later that year, Unitech sold 67.25% of Unitech Wireless to Norwegian Telenor for Rs 6,120 crore.
Since the sale of the stock took place when there were no other assets in the company’s books, this was considered to be the value of the license he held. Since then the scam has gone undercover.
The CAG report covered up the loss of up to Rs 1.76 lakh crore to the state due to the sale of free airwaves, while at the same time making profits for private companies like Unitech.
The 2008 financial crisis followed the collapse of Lehman Brothers. The Indian real estate market has plummeted.
By 2009, Unitech had acquired 14,000 acres of land across India and plans to raise $ 1.5 billion and another $ 1 billion from investors by listing some assets in the Real Estate Investment Trust (REIT) in Singapore to bank on these acquisitions.
But before the company could raise funds, financial markets collapsed, and Unitech’s fundraising plans were all put on hold. Ended up in debt of over Rs 8,000 crore.
Unitech shares fell free. Its market cap fell from Rs 87,300 crore to Rs 3,750 crore in 10 months. That’s a 96% wealth decline!
Unitech has a current market cap of Rs 600 crore.
# 2 Vodafone Idea
Telecom companies are plagued by high debt, fierce competition and lack of pricing.
High spectrum costs and regulatory issues have blocked the sector. And Vodafone Idea has been hit hard by this.
Vodafone PLC bought a 67% stake in Hutchison Essar for $ 11.1 billion and then sold it to the Indian tax operator for Rs. Vodafone Idea was taxed backwards when it paid a fine of Rs 20,000 crore.
Vodafone Idea was once the giant company that ruled the telecommunications sector, but perished when a new baby was born in this country.
Reliance Jio, the telecom baby of India’s richest man Mukesh Ambani, was born in September 2016.
With the introduction of Geo, India’s telecommunications story was rewritten. Big operators Bharti Airtel, Vodafone India and Idea Cellular are in for a surprise.
At that time, Vodafone received 90% of its revenue by calling. Reliance Jio’s free voice call made things worse. Later, Geo announced its cheaper tariff plans.
Aside from bringing in cheaper data plans, Geo also introduced the Geo Phone and Geo Phone 2 at very affordable prices, while Vodafone did not have such an option.
The telecom company has not been able to recover since joining Idea in 2018.
In 2019 the AGR judgment of the Supreme Court came in favor of the government, which asked the already affected company to pay or pay all the outstanding amounts related to the average gross revenue. This year, the court allowed the operators to pay within 10 years.
In April 2015, Vodafone Idea had a market cap of Rs 72,920 crore, down from Rs 8,480 crore in November 2019.
# 3 Suzlon Energy
This article may have reopened some old wounds for those who bought Suzlon at its peak in 2008.
In 2008, Suzlon Energy’s share price peaked at Rs. Was 459. But today it is Rs. Less than 7 is a penny share.
Until 2007-08, Suzlon was a healthy company. It recorded a consolidated net profit of Rs 1,020 crore for the financial year 2008 with a turnover of Rs 13,680 crore.
Suzlon’s Indian business did well, and it made large-scale global acquisitions. In 2006, it acquired Hansen Transmissions International NV, a Belgian windmill gearbox manufacturer.
In 2007, it acquired a majority stake in REPower, a German wind turbine manufacturer. Between 2007 and 2011, Suzlon gradually increased its stake in Senvion and eventually acquired the entire company.
But what we do not know is that the company’s advertisers began to boycott Indian markets in order to buy global markets.
The fall came in 2008 when Lehman Brothers collapsed. Order flow from the world’s two largest energy markets, Europe and the United States, was completely halted. Losses and debt both began to rise.
In the five years between fiscal 2010 and fiscal 2015, Suzlon’s losses nearly quadrupled to Rs 9,160 crore.
With a market capitalization of Rs 68,070 crore in January 2008, Suzlon’s market capitalization was Rs 5,530 crore in December 2008. More than 90% of assets were destroyed over a 11 month period.
# 4 BHEL
Wondering how a good stock like BHEL ended up on this list?
BHEL’s most popular role in the 2003-2008 bull run. Provided 10 times the profit at this point.
But the aftermath of the 2008 financial crisis left a hole to be filled for the country’s largest electronics manufacturer. After 2008, BHEL suffered from order cancellations and revenue reductions.
Back then, it was difficult for new orders to come in as higher interest rates affected the investment cycle.
BHEL’s market capitalization rose to Rs 1,40,680 crore in November 2007 on the basis of asset destruction. Its current market value is Rs 21,850 crore.
# 5 Reliance Communications
Before Reliance Jio came into operation, Reliance Communications (Arcom) disrupted the telecommunications sector.
While other operators charge up to Rs 4-6 per minute for even incoming calls, Arcom has provided them with a free handset of Rs 500.
RCom hired former Indian cricketer Virender Sehwag with a glamorous ‘Carlo Duniya Muthi May’ jingle.
However, the company opted for technology in CDMA and invested in expanding 3G and GSM services. That’s when the problems started.
Arcom found that CDMA services generate less revenue than GSM. So it invested heavily in publishing GSM services and eventually ended up in huge debt.
Anil Ambani impresses users with its 60% cheaper pricing strategy than its competitors.
But over the years, RCom has been unable to reduce debt due to rising debt, failed business sales and declining revenue.
The entry of Reliance Jio was another impetus that led to RCom drawing curtains on 2G and 3G services.
In 2012, RCom lost second place to Vodafone, moving to fourth place in 2016, eventually losing its grip on the market.
RCom tried to find solutions, one of which was a proposed merger with Aircel, but the deal failed.
Arkam’s market cap rose to Rs 1,69,320 crore in January 2008 when its share touched a high of Rs 821. Over the next 13 months, the share price fell to around Rs 150 and the market value fell to Rs 27,300 crore.
Wealth destruction does not stop there. Things got worse from worse. To date that company has not recovered. Arcam’s current market value is just Rs 800 crore.
# 6 Vakrangi
In January 2018, a little-known stock captured all the headlines. The market capitalization was reported to be over Rs 50,000 crore.
The market capitalization of a small software company was almost 4 to 5 times higher than that of companies with sales and profits.
It surpasses the market capitalization of Pharma Heavyweight Lupine (approximately Rs. 42,400 crore) the largest company with sales and net profit more than 4 times that of Vakrangi.
Investors in Vakrangi were rubbing their hands in delight. After all, the stock turned 10 bakers in two years.
Back then, Vakrangi was the largest registry agency for UIDAI and held more than 50 million Aadhaar registrations.
It came under the lens of the market regulator for manipulating the price and quantity of its own scripts on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
According to the report, the group of 22 customers associated with each other and the company continues to buy and sell scripts, accounting for 74.87% of the market total on specific days.
Following this news, the company’s shares fell free and fell further a few months later.
In May of that year, its auditor, Price Waterhouse & Co., abruptly resigned, saying it had repeatedly asked for information about the company’s election books, gold and jewelry businesses, but could not get any information about it.
With a market capitalization of Rs.
So these are among the many stocks that have deceived investors. Most of them were once large, well-known companies.
When these stocks fell and began to touch new highs, investors were eager to see a return. Instead, they fell more and more and destroyed more wealth.
These types of stocks are often classified as value traps … they provide value, but in reality they are traps.
They have some red flags like non-payment of debt, downgrade, sale of mortgaged shares, increasing debt and bad returns.
You need to learn to distinguish opportunities from traps, and in doing so, the first thing you need to keep in mind is that base stocks do not justify buying that stock. A steady fall can actually be a bad sign of something.
As the saying goes, investing is easy but not easy. Stock selection is tricky, but with the right basic analysis and the edge of protection, one can zoom in on it.
(This article is courtesy of Equitymaster.com)
(This story was not edited by NDTV staff and was automatically created from a syndicated feed.)