Controversies' Children: the big, bad stocks of 2011

Calendar 2011 would easily rank among the terrible years for equity investors in the Indian stock market. Things were already bad due to a combination of local and global problems, and a few companies compounded their shareholders’ misery by getting embroiled in controversies - mostly self-created and partly due to a tough business environment. Here is a list of stocks that made headlines in 2011, but for all the wrong reasons.

Mphasis: The software services firm did not disclose that a portion of revenues from parent HP in an earlier quarter was a one-off income. Incensed investors dumped the stock, and many equity analysts downgraded it, citing poor corporate governance as one of the key triggers. One broking firm even accused the company of deliberately wrecking the stock price so as to delist on the cheap in the coming months. The stock never recovered from the pounding it suffered in February, and is down 49 percent for the year so far.

[caption id=“attachment_159404” align=“alignleft” width=“380” caption=“Some stocks made headlines in 2011, but for all the wrong reasons. Reuters”] [/caption]

SKS Microfinance: Hailed as a blue-chip in the making when it listed in August last year, the microfinance lender turned out to be a riches-to-rags story for its shareholders. Since Andhra Pradesh was its largest market, the state government’s curbs on the microfinance industry wrecked SKS’s bottomline. Complicating matters for SKS was the power struggle within the board which eventually culminated in the ouster of founder and chairman, Vikram Akula. SKS is down 84 percent for the year

GTL, GTL Infra: Nobody knows what triggered the collapse in the share prices of GTL and group company GTL Infra in June. The company’s weakening fundamentals was the starting point. But that alone could not have brought down the GTL stock by 62 percent in a single trading. It is very likely that the promoters would have pledged a big chunk of shares outside of what was officially disclosed to the stock exchanges. Both companies’ balance sheets look as though they were in a train collision. Negotiations with lenders are on. GTL is down 92 percent for the year, GTL Infra, 82 percent.

Crompton Greaves: The engineering major’s first quarter earnings fell short of market expectations by a huge margin. But what angered investors even more was that former managing director and now non executive-chairman SM Trehan selling his entire holdings just a few weeks before the disappointing numbers. The stock crashed amid murmurs of insider trading. Then there was also the issue of the corporate jet purchased using shareholder funds. Promoters tried to restore confidence by buying shares at lower levels, but the damage had already been done. Crompton is down 62 percent for the year.

State Bank of India: India’s largest lender stumped investors in May when its fourth quarter net profit plunged due to a steep increase in provisioning for bad loans. Analysts accused the bank of shoring up its profits in the earlier quarters by not making adequate provisions when it should have, and then providing everything at one go so as to meet the RBI’s September 2010 deadline for bad loan cover. Adding to the bank’s woes, the government has been dragging its feet on infusing capital in the bank through a rights issue. This prompted talk in the market that the government was deliberately delaying funds to SBI so that private players could benefit. SBI is down 38 percent for the year.

Pipavav Defence (formerly Pipavav Shipyard): The company issued 1.05 preferential warrants to high-profile proprietary investor Rakesh Jhunjhunwala just a few days before announcing a joint venture with state-owned Mazgaon Dock for building warships and submarines. Pipavav’s business rivals shot off a letter to the Defence Ministry questioning Pipavav’s track record and execution skills. Stock market players alleged that Pipavav had roped in Jhunjhunwala to improve the stock’s perception among the investor community and boost its valuation. Pipavav is down 22 percent for the year.

Reliance Industries: The company is accused of inflating its expenses for developing the KGD6 block, something that would delay the government’s payoff from the block as it is entitled to its share of profits only after Reliance recovers the development costs. Already, output at the gas block has plunged and RIL’s rivals allege that the company is waiting for global gas prices to move up before ramping up production. The RIL stock has also been weighed down by the ongoing probe into alleged insider trading in Reliance Petroleum shares.

Reliance shares have fallen 30 percent in 2011.

Everonn Education: The company’s managing director P Kishore was arrested for allegedly attempting to bribe an Income Tax official after having understated taxable income. The stock nosedived as institutional investors fled. The Dubai-based Varkey Group later bought a strategic stake in the company at a huge premium to market price. But Everonn shares are still down 44 percent for the year.

DB Realty, Reliance Communications: Both stocks fell following the arrest of key company executives for alleged involvement in the 2G telecom scam. DB Realty is down 71 percent for the year and Reliance Communications, 52 percent.

Sun TV: Allegations that the company had benefitted from Dayanadhi Maran’s largesse when he was telecom minister (Dayanidhi is the brother of Sun group promoter Kalanithi Maran) triggered a sell-off in the stock. Sun TV is alleged to have uploaded data using illegally provided ISD connections. To make matters worse for Sun, the AIADMK-arch rival of DMK of which Dayanidhi Maran is a member - came to power in the state. This undermined Sun group’s hold on the film industry and its near monopolistic position in the cable TV business. The stock is down 47 percent so far this year.

Reliance Infra: The company was barred by Sebi from the stock market till 2012. The case related to the routing of fund raised abroad to buy shares of companies belonging to the Anil Ambani group. Reliance Infra shares have fallen 58 percent in 2011 till now.

Adani Enterprises, JSW Steel: The entire steel sector was hit by the Supreme Court order banning iron ore mining in Karnataka. But Adani Enterprises and JSW Steel fared worse compared to peers, having to put up with reputation loss in addition to financial loss. The Lokayukta Panel alleged that the two companies paid bribes and engaged in unethical corporate behaviour to get around Mining regulations. Adani Enterprises shares are down 51 percent for the year, and JSW Steel, 57 percent.

Dhanlaxmi Bank: One of the labour unions of the bank raised questions about the bank’s financial health and alleged mismanagement by the top brass. The management strongly refuted the allegations, but the stock price is yet to fully recover from that bout of panic selling. So far in 2011, the stock is down 58 percent.

Kingfisher Airlines: It has been a bad year for aviation companies in general, because of high crude oil prices and fierce competition. UB group chairman Vijay Mallya claims the media exaggerated the problems with his airliner, but the fact is Kingfisher has suffered more than its private sector peers. It is struggling to pay its daily fuel bills, has lost many pilots and has cut down on the number of flights. Stock down 65 percent this year.

Maruti Suzuki: Maruti made the maximum headlines this year, thanks to persistent labour problems at its Manesar plant. The periodic strikes hit production in a year when car sales were anyway slowing down because of high interest rates and costly fuel. The company finally resolved the issue but it could be a while before sentiment for the stock improves. Maruti shares are down 34 percent this year so far.