Article Summary |
The Issue: Will it be wise to invest in loss making companies? |
The Solution: One day doesn’t make a summer. The risks are very high whereas the rewards may be unpredictable. |
Investors put their hard earned money in a stock with the anticipation of good financial performance of the company. Many of them analyze the net profit, EPS, P/E etc. before they invest in stocks. Profit making companies, in general, will be preferred by the public compared to loss makers.
However, not all the listed companies are profit making. We discussed about Dish TV, a technically bearish loss making company in my earlier article, “5 India Stocks to Avoid in the Short Term”. In this article we shall analyze some stocks which gained reasonably during the last one year, in spite of poor financial results.
Industrial Finance Corporation of India (IFCI):
Founded in 1948, IFCI was catering to the long term financial needs of industrial sector. It had access to low cost funds through the RBI’s Statutory Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to corporate borrowers at concessional rates. Though it functioned as a statutory corporation for about 35 years, it ultimately became a company in 1993.
The following table shows the year wise net losses for IFCI (Rs. Crores):
| Year | Net Loss | EPS |
| 2003 | 259.70 | -4.78 |
| 2004 | 3229.78 | -51.28 |
| 2005 | 443.40 | -5.79 |
| 2006 | 74.10 | -1.30 |
It can be seen that the company had made severe losses in the 4 years. The stock’s technical scenario is discussed in the monthly chart shown below.
In June 2006, the stock closed at 9.10. A long term powerful bullish breakout occurred during January 2007. Some 1.7 billion shares were traded during the month and the stock had also got appreciated by 112.45%. The stock closed at 55.80 in June 2007, a gain of 513% over a year.
The company announced later that it had planned to offload its holding in ICRA and NSE. It had also indicated that it might sell Malavika Steels, a stressed asset of the company.
Now it is clear that the market has anticipated the positive news from IFCI in January and this was the reason behind such a huge upmove. The previous years’ losses made by the company were completely discounted by the market.
Incidentally, IFCI has reported a net profit of Rs.898 crores for the financial year 2007.
New Delhi Television Limited:
New Delhi Television Limited (NDTV), founded in 1988, is India's first and largest private producer of news, current affairs and entertainment television. It has 3 round the clock TV channels in India, NDTV 24x7 (English), NDTV India (Hindi), NDTV Profit (Business Channel – English). It has launched a 24 hour news, infotainment and lifestyle channel "Astro Awani" in Indonesia.
The following table shows the net profits for the company (Rs. Crores):
| Year | Net profit | EPS |
| 2004 | -50.00 | -10.23 |
| 2005 | 29.19 | 4.93 |
| 2006 | -6.25 | -1.03 |
The monthly chart of NDTV is displayed below:
It could be noticed that the previous high at 271.40 could not be conclusively broken during April 2006. However, during January 2007 there was a bullish breakout with reasonably good volumes, as indicated in the chart. Yearly gain between July 2006 and June 2007 works out to 140% (173.90 to 417.85 on monthly close basis).
NDTV later announced that its subsidiary NDTV Networks Plc. has completed it's pre-IPO fund raising programme with the receipt of $100m of convertible bonds due in 2012. The implied post money valuation of NDTV Networks, after completion of this round is $500m.
Despite losses incurred by the company in the previous years, the stock had run up anticipating the positive news.
Deccan Aviation Limited:
Air Deccan is India’s largest low cost carrier. It flies to several destinations which other major airlines don’t fly. Air Deccan provides affordable air travel at very low costs to the common man and its vision is to ‘empower every Indian to fly’. However, it has had its criticisims too, like poor punctuality, dirty seats, sudden cancellations, customer unfriendly staff etc. It has a policy of free seating and does not provide pre-assigned seat numbers during boarding on any of its flights. Air Deccan serves refreshments on board which have to be purchased at a cost. No refreshment or drink including water is served free of charge.
According to the data available at the NSE web site, the company has incurred a net loss of Rs.341 crores for the period April 2005 – June 2006 at a negative EPS of -68.24.
AIRDECCAN got listed on June 12, 2006. Its issue price was 148. However, it opened low at 129.90. In July 2006 it touched a low of 64.10. The weekly chart is given below.
Nearly after 7 months it got listed, the stock managed to close at 159.15 (above its issue price of 148) during second week of January 2007. That was a possible exit opportunity for those who bought the stock at the IPO price. Once again it became bearish and made a low of 86 in the first week of April 2007.
The daily chart of AIRDECCAN is shown below.
Watch the upward gap and downward gap formations in the month of April this year. This was an indication that the market was anticipating some positives from this stock.
The “upward gaps” indicate strong demand while “downward gaps” indicate a sell off or strong supply. But both downward gaps shown below had not encountered heavy volumes.
Effective May 14, 2007 the stock was included in F & O (Futures & Options) segment. For these F & O stocks no price band is applicable. On May 17, 2007 the stock went up by 22.78%.
On June 21, 2007 there was an announcement regarding Deccan Aviation:
“Edelweiss Capital Limited had informed the Exchange regarding the Public Announcement for the Open offer to acquire up to 27,094,024 equity shares of Rs.10 (Rupees Ten Only) each of Deccan Aviation Limited (Target Company) by Kingfisher Radio Limited, a wholly owned subsidiary of United Breweries (Holdings) Limited, along with the Persons Acting in Concert (PACs), namely, United Breweries (Holdings) Limited, its 100% subsidiary, UB Overseas Limited”
United Breweries group, headed by Vijay Mallya, owns Kingfisher Airlines, another private Indian aviation company. This was a ‘positive’ news for the market. Between July 2006 and June 2007 stock had gained 60%.