Kotak had put this as one of the top picks of 2013 along with ICICI Bank and Marico, even though the stock was exactly at the same level as it was in December 2011, when the Sensex was 15,455, as compared to 19,664 now
We have often mentioned that securities analysts and fund managers are often blind about corporate governance issues. Here is one more excellent example of that. Kotak Securities picked Arshiya International as one of the top five stocks for 2013. This company which is largely unknown to the investing public was placed in the august company of such blue chip stocks as ICICI Bank, Marico, Petronet and Engineers India as one of the tops picks for 2013. Arshiya is into a business called Foreign Trade & Warehousing Zone (FTWZ). Importers can import and stock products in the FTWZ and draw their stocks as per their needs. Kotak touted the stock as “unique business model, new in India, and adopted by Arshiya. The company is also ramping up its container rail business which will effectively complement its FTWZ business. The business model of Arshiya is completely integrated and a one-stop-shop to cater to the point-to-point logistics requirement of the customers”. Well argued by Kotak analysts as usual, and backed by excel wizardry that would pinpoint the exact profit the company would make five years later. But alas, instead, the stock is in a downward spin. It hit the lower circuit for three days in a running including today, crashing from Rs121.70 on 8th January to Rs70.20 today. Kotak has promptly suspended its coverage of the stock—whatever that means. What went wrong?
According to DNA newspaper, Arshiya is suffering from sharply reduced business, has sacked 290 employees and has not paid salaries since September. The disgruntled employees have also alleged financial irregularities. The sacked staff visited the company’s office on Tuesday and threatened the regular employees to stop working or face dire consequences. The police had to be called.
So, what does Kotak have to say about its chosen stock? According to Moneycontrol (http://www.moneycontrol.com/news/business/arshiya-down-20-for-2nd-day-kotak-suspends-coverage_805825.html) Kotak said in a note to clients, “The stock has declined by 40% over the last 12 months, largely driven by slowing economic growth which has led to less than estimated growth in segments like FTWZ/Container rail and high debt position. Given the above and lack of clarity on the alleged wrongdoing by the management we are suspending coverage on the stock till clarity emerges.”
Clearly, either the brokerage is clueless about what is really going on inside the company (often analysts are) or it had some vested interest in putting Arshiya as one of top stocks of 2013. After all, economic growth did not slow down in the last two weeks to affect only this one company so badly. And to admit to recommending a stock which has problems of governance would be affect its credibility too badly.
After the stock was badly hit, the company organised a concall where Samir Arora, the star Singapore-based fund manager, who lost a lot of money betting on the software bubble in 2000-01, grilled the management as did Pathik Gandhotra, partner of Don Capital. A lot of smart guys had bet on Arshiya’s “unique business model.”
The promoters denied that there was any margin call from the bankers but, the way Arshiya stock has been hitting the lower circuit for three days in a row shows that there are indiscriminate sellers. Such indiscriminate sellers are often financiers.
Arshiya’s stock price has completely bucked the bull market of the last one year. While the Sensex was 15,455 on 30th December 2011 and is 19,664 now, a rise of 27%, Arshiya was Rs127.50 on 30th December 2011 and It was still stuck at Rs125 (on 4 January 2013) before the stock got hit. This alone should have alerted the smart analysts and fund managers.