Punters bet on shares of NCLT companies
Stock prices rise 40-100% over 3 months on hopes of turnaround
Share prices of companies going through the resolution process under the Insolvency and Bankruptcy Code have shot up sharply in the past three months. Speculators expect these companies to turn around under the new management.
Besides the 12 companies that have been referred to the National Company Law Tribunal (NCLT), share prices of companies which are part of the central bank’s second list of defaulters have also gained.
Half of the listed companies on both lists saw their share prices rise between 40 per cent and 100 per cent in the last three months in spite of the companies making huge losses and defaulting on loans.
Lanco Infratech, for example, which had an outstanding debt of ~443 billion, was up 104.5 per cent in the last three months, while the NCLT has begun bankruptcy proceedings.
“There is a significant interest from high net worth individuals in trading the shares of stressed companies. These investors are anticipating that there will be a bank resolution for most of these firms, which means these companies still have some intrinsic value. Today, several of them are trading below book value,” said B Gopkumar, chief executive officer, Reliance Securities.
“Several of these groups such as Lanco and Videocon, for instance, operate multiple businesses, some of which may be doing well. So when one does sum-ofthe-parts analysis, some of these stocks may look attractive,” he added.
The stock of Jaypee Infratech, which is unable to finish its real estate projects, is up 70 per cent in the last three months, while Videocon is up 65.3 per cent in the same period.
The BSE Sensex was up eight per cent in the same period and, in fact, is up by only four per cent in the last one month.
The share price of the biggest non-performing asset (NPA) account in the Reserve Bank of India’s (RBI’s) first list, Bhushan Steel is up 18 per cent, while Electrosteel Steels is up 46 per cent. Tata Steel, Vedanta, Edelweiss Asset Reconstruction Company, and Renaissance Steel India have submitted resolution plans for Electrosteel Steels and analysts said if any of these big players were to bag Electrosteel, it would be good news for minority shareholders.
Analysts, however, warn that betting on stressed companies’ stocks is like playing with fire. “Considering the euphoria in the markets currently, buying into stressed companies, hoping for a turnaround, seems tempting. However, this strategy is very risky and should be attempted only by savvy investors and that too after they’ve done a lot of homework,” said Krishna Kumar Karwa, managing director (MD), Emkay Global Financial Services.
“Every company has its own intricacies and it remains to be seen if there will be any equity value left for minority shareholders after restructuring/resolution. When banks take large haircuts, it is difficult to imagine any equity value left for existing shareholders,” he warned.
Some bidders are in favour of getting these companies delisted from the stock exchanges, saying once it was sent to the NCLT, it would give the wrong impression to investors. “The debt of these companies has turned into junk status and hence, equity value of these companies should be zero and should be delisted immediately,” said Seshagiri Rao, joint MD of JSW Steel, which has bid for Bhushan Steel and Monnet Ispat assets. The government is currently looking at the suggestion of delisting.
The promoters’ stake in many companies is already pledged with banks and in many cases, the banks have invoked the pledge.
Interestingly, it’s not only the companies that made it to the NCLT which have seen a massive revival of fortunes in the stock markets. The stock of Reliance Communications, which has become an NPA in the lenders book from January 1, is up 216 per cent in the last one month. This was after the company promised it would sell its assets, and followed it up with the sale of telecom towers and spectrum to Reliance Jio.
The RBI had referred 12 companies for insolvency proceedings in its first list in June and had shortlisted another 28 companies in the second list in August. The 12 companies from the first list are Bhushan Steel, Lanco Infratech, Essar Steel, Bhushan Power & Steel, Alok Industries, Amtek Auto, Monnet Ispat, Electrosteel Steels, Era Infra, Jaypee Infratech, ABG Shipyard, and Jyoti Structures.
Banks were unable to restructure loans in most of the second list firms by the RBI’s deadline of December 13, 2017, and the NCLT will soon begin bankruptcy proceedings.