Amid rally, illiquid stocks shrink
There are around 20 per cent fewer stocks on the list than lockdown highs
The list of stocks that have so few trades that exchanges create a special session for them to change hands has shrunk in the past six months.
The number of illiquid stocks had risen from 420 to 440 between March and June 2020. This roughly coincided with the lockdown to control the spread of Covid-19.
This number declined by around a fifth to 342, according to the December quarter data from the BSE.
Retail investors looking to make money in illiquid stocks are unlikely to make an easy buck, with most companies’ fundamentals being rarely tracked, according to independent market expert S P Tulsian.
Any investors should think twice before investing in such companies without adequate research, according to Tulsian, suggesting that the chances of losses are high. “He is digging his own grave,” he said.
Alok C Churiwala, managing director at Churiwala Securities, said investors who feel they missed the bus during the recent runup in the stock market should be careful about the kind of companies they invest in, to avoid burning their fingers.
“When the markets are in this kind of frenzy, there are many investors — especially first-time investors — who are taken in by the lure of penny stocks,” he said.
ATTRACTING INVESTORS
Number of illiquid securities
Stocks are declared illiquid when certain conditions that the regulator sets aren’t met. This includes criteria, such as the daily average value of shares changing hands falling below ~2 lakh for the previous six months. It excludes companies which are valued at more than ~10 crore.
Other factors for exclusion from the list may be the payment of dividends or having been profitable in two of the last three years, a promoter who hasn’t pledged more than 20 per cent of his or her shares, and meeting minimum criteria on assets that the company owns.
The exchanges hold a special session for stocks that are declared illiquid. This periodic call auction mechanism allows buyers and sellers to provide orders for a set period. These are then matched and executed separately. There are also limits on how much the price of such stock can move in a single day.
The rise in activity in stocks which were illiquid earlier comes at a time when new investors are entering the stock market in large numbers. The number of investor accounts rose to 49.8 million as of December 2020. There were 43.2 million accounts as of June 2020. A total of 6.6 million accounts were added over six months as the stock market rose from its pandemic low, showed the data from the Securities and Exchange Board of India.
The S&P BSE Sensex hit a low of 25638.9 on March 24, 2020. It touched an all-time high of 52516.76 on Tuesday.
Churiwala suggested avoiding leverage and only investing capital that can be put to work over the long-term. Valuations in the secondary market are already very high, he said.
Vodafone Idea's (Vi) December quarter results failed to budge brokerages into changing their bearish stance on the stock, even as the telecom operator reported narrowing of losses during the quarter under review.
The debt-ridden telecom firm, on Saturday, reported narrowing of consolidated loss to ~4,532.1 crore in Q3FY21, mainly on account of a one-time gain from stake sale in Indus Towers. It had posted a loss of ~6,438.8 crore in the same quarter a year ago.
The company's average revenue per user (ARPU) improved to ~121 from ~119 on a quarter-on-quarter basis. However, this was still lower than its competitors Bharti Airtel and Reliance Jio that have an ARPU of ~166 and ~ 151, respectively. The percentage of customers leaving its network came down to 2.3 per cent in the third quarter, compared to 2.6 per cent in the previous quarter. But this figure is down over 11 per cent on a yearly basis.
Irrespective, brokerages believe that fundraise and a tariff hike are of importance and the management has approved raising up to ~25,000 crore.
The shares of the firm have gained 26 per cent since the end of September 2020, against a 41 per cent rise in Airtel and a fall of 9 per cent in Reliance Industries, parent of Jio. During the same period, the BSE Sensex has gained 37 per cent and the BSE Telecom 40 per cent, ACE Equity’s data shows.
Going ahead, analysts see up to 70 per cent downside in shares of Vodafone Idea and expect them to once again turn into penny stocks, i.e. slip below ~10.
Here's a look at what some of the brokerages said:
Goldman Sachs Downside potential: 73%
We believe a one-time capital raise will not be a sustainable solution to Vodafone Idea’s balance sheet stress. We estimate the company’s Ebitda will need to be 4x versus December 2020 quarter levels to be FCF (free cash flow) neutral; said differently, its ARPU will need to be higher by ~105, or 1.9x of current levels.
A rise in ARPU can only be gradual, and thus for Vodafone Idea to get even close to the required 1.9x levels; the process of increasing tariffs will need to start in the immediate future.
Credit Suisse Downside potential: 49%
Leverage remained unsustainable at 25 times, even though it declined from 27 times in the previous quarter with the improvement in Ebitda. Further, we highlight that under-investment continues with capex of mere ~970 crore during the quarter and ~2,610 crore for the M9FY21. We believe that Vodafone Idea needs meaningful capital infusion on an urgent basis to break out of this vicious loop of underinvestment and market share loss.
ICICI Securities Downside potential: 49%
VIL remains the weakest private telco. AGR dues payment extension was a shortterm breather. Its survival hinges on quick capital infusion and tariff hike implementation.
The need for capitalisation is of paramount importance mainly due to its lagging spends on network and relative market share loss. We will monitor triggers like fundraise, and tariff hike, before changing our stance.
JM Financial Downside potential: 41%
While the fundraise of ~25,000 crore will help Vi tide over the near-term liquidity issues, we estimate that the company will require an ARPU of ~200-210 by FY23E to meet its payment obligations. We reiterate ‘sell’ rating due to the limited visibility on tariff hikes.
Emkay Global Downside potential: 58%
A deceleration in the pace of subscriber losses, lower churn, and healthy 4G additions were definite positives in the quarter. That said, although sustaining them is crucial, it seems to be a daunting task given constrained capex spends. Bearing in mind the upcoming 4G/5G spectrum auctions, disputed timelines for AGR payment, and deferred spectrum obligation starting from FY23E, we believe a single round of fundraising will be like a “band-aid on a bullet hole” and will not be able to meet the impending cash burn of ~24,400 crore in FY21-23E, despite assumed tariff hike in FY22E. Even then, any positive outcome of the petition for the recalculation of AGR dues can be a game-changer and shall reduce overhang.
The shares of the firm have gained 26 per cent since the end of September 2020, against a 41-per cent rise in Airtel and a fall of 9 per cent in Reliance Industries, parent of Jio. During the same period, the BSE Sensex has gained 37 per cent and the BSE Telecom 40 per cent, ACE Equity’s data shows