The scam-polluted environment spells doom for stocks of companies with suspected links to political figures and parties
Even as the skeletons keep rolling out of the cupboards of Indian officials and politicians, companies that are seen to have affiliations to politicians are paying the price for their connections. Investors have suddenly found reason to turn sceptical about the links of some corporates to the political class and they are losing losing confidence in these companies. As such, the stocks of several companies have taken a severe beating in this scam-polluted environment.
As if the 2G spectrum fiasco and the scandalous tapes involving high-profile bureaucrats, industry leaders and journalists in a power-broking drama weren't enough to unsettle the markets, the recently unearthed bribes-for-loans scam has only fuelled the fire. Several companies and their promoters suddenly find themselves on the radar of nervous investors, who fear more dirty linen may be washed in public.
Indeed, among the companies that have seen substantial erosion in their market valuations are those whose promoters share strong equations with some influential political leaders in the country.
For instance, HCC's stock has plunged 38% from its level earlier in the month. It turns out that the controversial Money Matters Financial Services is associated with Lavasa Corporation-a subsidiary of HCC-for whom Money Matters acted as an agent to sell its properties. Lavasa was also hauled up by the Environment Ministry last week, for some violations, and this is keeping investors on tenterhooks. Promoter Ajit Gulabchand is close to agriculture minister Sharad Pawar.
IRB Infrastructure's chairman and managing director Virendra D Mhaiskar is also known to be close to Sharad Pawar. The IRB stock has hit Rs195 from Rs270 in a matter of weeks. Jaypee Infratech and HDIL are also companies which were associated with Money Matters Financial Services, which arranged loans for them early this year. Jaypee is seen to have considerable influence due to its affiliation with Uttar Pradesh chief minister Mayawati. The Jaypee has plunged 22% since 12 November 2010. HDIL's managing director Sarang Wadhawan is seen to have connections with leaders in the both the Congress and the Shiv Sena. The HDIL stock has sunk 32% since 10 November 2010.
On a different note, IVRCL and Nagarjuna Constructions seem to have suffered a crisis of confidence post the death of popular leader YS Rajasekhara Reddy in a helicopter crash last year. The stocks of IVRCL and Nagarjuna have been quite weak throughout 2010. In November they tanked 22% and 20% respectively.
These companies, while capable of executing large infrastructure projects, had benefited from YSR's focus on infrastructure development in Andhra Pradesh.
This sharp fall in stock prices is not a comment on the quality of these companies, but rather a turnaround in market perception. For long, companies with strong political affiliations have been known to find a favourable place in investors' minds, given the muscle power and flexibility that came along with keeping such company. However, this very 'advantage' that seemed to work so well in favour of these companies seems to have suddenly turned into a weakness.
High Mark will be the country's fourth credit bureau after CIBIL, Experian and Equifax
High Mark Credit Information Services today became the fourth credit information company in the country to receive the approval of the Reserve Bank of India (RBI) to operate as a credit bureau.
The other three that in operation are Credit Information Bureau of India (CIBIL), Experian Credit Information Company of India and Equifax Credit Information Services. TransUnion International Inc holds a 19.99% stake in CIBIL.
Experian started operations in India in August this year, and was followed by Equifax, which commenced operations last month, in partnership with Bank of Baroda, Bank of India, Kotak Mahindra Prime Ltd, Religare Finvest Ltd, Sundaram Finance Ltd and Union Bank of India.
The RBI issued provisional licenses to Equifax, Experian and High Mark in April 2009 for setting up credit bureaus. In November 2008, the central bank allowed foreign direct investment of up to 49% in credit information companies, with a ceiling of 10% of the total voting rights for any single investor group.
In July this year, Micro-finance Institutions Network (MFIN), a network of more than 40 micro-finance companies, invested Rs2 crore for a 5% stake in High Mark. The credit information to be provided by High Mark will be useful for the business of these companies, more so at a time when the micro-finance business has been afflicted by mass defaults on loan repayments in the states of Andhra Pradesh, Karnataka and West Bengal.
Experian, TransUnion and Equifax are the largest credit bureaus in the world. High Mark is a start-up promoted by Professor Anil Pandya and Anuj Desai. According to media reports, venture capital firm Battery Ventures bought a 10% stake in High Mark for about $1 million last year. In 2005, Professor Pandya founded High Mark and in 2007 the company applied to the RBI for a license to operate as a credit bureau.
Among the public sector plays that have hit the primary market in the past four years, banking and finance companies have clearly emerged trumps. Other PSUs have not done so well
Initial public offerings (IPOs) by public sector undertakings (PSUs) are coming thick and fast. Just a few weeks ago, Coal India raised Rs15,000 crores. Now Manganese Ore is raising Rs1,250 crores. There is a lot of interest and excitement about these issues. But have they delivered great returns? Yes, but only those that are in the banking and finance business. Investors who have bet on the IPOs of manufacturing and service businesses of PSUS have not had great success.
Since 2007, nine PSUs have made their debut on the national bourses. Most prominent among these are companies in core industries of the economy-Oil India, National Hydro-electric Power Corporation (NHPC), Coal India, Power Grid Corporation. However, apart from Oil India, the others have performed poorly since listing day.
The worst performer in this category is NHPC, which has tanked 24% since its debut in September 2009. It listed at Rs39 and is now languishing at Rs28. Satluj Jal Vidyut Nigam (SJVN), another hydro-power company, is trading 19% lower than the price it listed at (Rs28) in May this year. The stock prices of Power Grid Corporation and Coal India have not been able to maintain their momentum, trading only 4% and 9% higher from their listing prices. Only Oil India has put up a solid show, having delivered annualised gains of 29% since debut.
Meanwhile, the stocks of PSUs that have done very well are finance and banking companies, a segment that has clearly dominated the markets over the past few years. Power Finance Corporation, the state-run power sector financing company, has enjoyed a fabulous run since its opening on 23 February 2007. The stock, which was listed at Rs104, is now trading at Rs313-a solid annualised gain of 34% over the period.
Rural Electrification Corporation is another financing company that has proved beneficial for shareholders. This Navratna company, whose objective is to finance and promote rural electrification projects, has witnessed a spike of 41% since its debut on 12 March 2008. After listing on the bourses at Rs125, the stock now trades at Rs316 in the open market.
Banking stocks have been at the forefront of the stock market rallies of late. Not surprisingly, stocks of public sector banks (PSBs) that took the IPO route in the past three years have turned in stellar performances on the bourses. United Bank of India, which got listed at Rs77 in March this year, has since yielded gains of 55%. Similarly, Indian Bank and Central Bank of India (both hit the primary market in 2007) have witnessed annualised gains of 28% and 12% respectively, over the listing price.
One reason for this great stock performance is that Indian banking and finance companies were in a sweet spot for the last few years. Low interest rates and a steady demand for loans ensured that banks have enjoyed volumes as well as interest spreads. As long as this happy situation continues, PSU banking and finance companies will make money. However, investors chasing the IPO rainbow with PSUs will have to think twice before they extrapolate the performance of a PSU finance company to a PSU core sector manufacturing company.