Hyderabad-based companies decimate investors’ wealth
Moneylife Digital Team 11 November 2011

The performance and stocks of the biggest companies from the city are on an endless slide amid mounting controversies of political nexus and mis-governance

While the Telangana saga unfolds, Hyderabad prepares for another battle. But the nightmares have already started for the investors of some of the biggest and most well-known Hyderabad-based companies. Many of them started with the blessings of the powerful, these ‘politically connected’ companies have failed to live up to expectations. Most of them pursue capital-guzzling projects that are difficult to execute and are destined to be value destroyers over the long term. The stocks of these companies have fallen sharply on pure mis-governance.

The canon is spectacular. GVK Power & Infrastructure, Nava Bharat Ventures, KSK Energy Ventures, GMR Infrastructure, Lanco Infratech, Nagarjuna Construction Company, IVRCL Limited and Deccan Chronicle Holdings—these are the companies that once heralded the rise of Hyderabadi businessman. They attracted many investors who were sure that the political patronage would make sure their investments multiplied. Most of these stocks have lost 80% from their peaks. Then there are companies like SKS Microfinance and Aurobindo Pharma which have plainly been mismanaged and have been savagely sold off by investors.

Since they were listed, all these stocks climbed and boomed, before they crumbled into an unceremonious heap. Just on 28 September 2010, SKS Microfinance was trading at Rs1490.70, and on 9 November 2011, it had fallen by a humungous 88%. GVK Infrastructure has seen a decline of over 87% from its all time high of Rs93.50 on 6 December 2007 and KSK Energy lost 20% on Wednesday itself; and has declined by 68% from its all time high at Rs250 on 20 May 2009. Political connections have not been able to substitute governance and financial management issues.

 
Allegations of corruption, too, have taken a toll on these scrips. Take the case of GVK, GMR and Lanco groups. Their owners belong to the powerful Reddy caste who own huge tracts of agricultural lands in Andhra Pradesh; and have a penchant for investing in infrastructure and power projects because it needs money and connections. Politically, the companies had a fairy-tale beginning: GVK group founder GVK Reddy’s son married the daughter of Congress MP T Subbirami Reddy, himself a prominent businessman. Earlier this year, GVK Reddy’s granddaughter had an obscenely extravagant wedding, which was attended by all the who’s who of the country. Lanco group honcho L Rajagopal (also a Congress MP) is the son-in-law of former Union minister P Upendra. And GMR Rao hadn’t done too bad himself.

Then the scandals appeared. When Satyam fell, the other Hyderabad stalwarts took a hit, too. Later, news of unlawful land occupation appeared against the GVK Group. Lanco Amarkantak Power Private Limited (LAPPL) at Korba was denied clearance when villagers protested against burdening an already polluted area. First allegations of bribery appeared against the GMR group for getting land; then the Comptroller and Auditor General (CAG) report slammed the company for overshooting its budget by Rs8,995 crore for developing the Delhi Airport.

Companies like Nagarjuna Construction had also suffered. Its subsidiary, Nelcast, got clearance for its thermal power plant through dummy coal linkages. Deccan Chronicles had seen its revenues dry up while its competitors moved ahead. Struggling under increased costs of new regional editions, the company went on to sponsor an IPL team. When the IPL scam was exposed, things became worse for the company.

SKS Microfinance had less to do with the political nexus but turned out to be as self-serving. After its big bang initial public offer (IPO), it posted record losses only 15 months later, amid mounting controversies. The reason was provisioning and write-offs amounting to more than Rs350 crore on account of its dud portfolio in Andhra Pradesh, where both collections and loan disbursements have almost come to a halt after the clampdown by the state government. The clampdown came after stories of gross excesses in both lending and collection by microfinance companies.

Aurobindo Pharma, another Hyderabad heavyweight, has posted Rs80.2 crore loss for Q2 2011. The company had received a warning letter from US Food and Drug Administration (USFDA) in May this year following an import alert in February for its antibiotics-producing unit at Chitkul village in Hyderabad, Andhra Pradesh. Consequently, the company’s drugs produced at the unit were banned in the US market. IVRCL is now under CBI scanner for alleged irregularities in a tsunami housing project in Puducherry. Another politically connected firm KSK, too, has posted losses.

After the Telangana issue exploded, corruption scandals started appearing everyday against Andhra’s leaders, almost on a daily basis. The troubled government is in no shape to look after its friends. Head of Ambit Capital, Saurabh Mukherjea writes in VCCircle, “While the recent spate of corruption scandals has soured investor sentiment regarding India, it has had a salutary effect—forcing investors to focus on fundamentally high quality companies. My colleagues have shown in our published research that for the first time in five years, I now have a situation where politically well-connected companies are no longer outperforming the broader market.”

 

Comments
Alok Kejriwal
1 decade ago
You are absolutely right.

Check out my own experience here - http://therodinhoods.com/forum/topics/wh...
Srinivasan
1 decade ago
Dear Moneylife Team,
I do not know what sort of due diligence you do before recommending stocks for gullible investors. In this link http://www.moneylife.in/article/aurobind...
You state Aurobindo pharma is in good health. The import alert, or warning letter from USFDA as non major revenue hindrances. Now you state it is grossly mismanaged. I wonder you guys do a proper homework at all. In hind sight even naive investors can smell something fishy. I wonder even if this article is well researched or guesswork on the basis of stock prices falling, implying some governance issues. Please write proper well researched views, rather than to confuse investors. I know you guys do a lot good investor awareness programmes, but these conflicting views from your team using foresight and hindsight analysis, doesn't throw great picture. Thanks.
Moneylife Team
Replied to Srinivasan comment 1 decade ago
We recommend many stocks. One or two may turn out to be poor performers. That is why we print the stop loss strategy in every issue.
The performance of a portfolio does not depend on just one stock. You have to see the performance of our recommendations and that too over a period of time.
Aurobindo Pharma fell from Rs160 in June 2007 to Rs20 in November 2008 and then went up to Rs263 in December 2010. It is the nature of stockmarket and mid-cap stocks.

All companies go through temporary difficulties. That is no reflection of their long term performance. They can correct their mistakes.
srinivasan M
Replied to Moneylife Team comment 1 decade ago
I did not understand trying to justify a fundamental call going wrong from your team, with examples of severe price corrections of the past in the stock and stop losses. Infact I did not find any stop loss in your previous article on Aurobindo pharma. Also a fundamental analysis should never worry about stop losses. It should worry only about the valuation gap. If price drops and if the fundamentals are analysed well in the first place, then the stock should be averaged at lower levels. Stop losses are only for day traders and swing traders. Iam not worried about price corrections at all. But to recommend a stock as well managed and in just six months time to state it as grossly mismanaged and a wealth destructor is truly baffling on your analysis part. Such flawed fundamental analysis need not be justified saying stock market is about price fluctuations. Flaw should be accepted and remedy to be taken in further articles.

Anyways as a regular reader I am expecting well researched articles. I notice your analysts only analysing just 4 quarters or 5 quarters of past performance. It would help readers if you can dig deeper and make complete analysis. Like analysing past 4 yrs business cycles than just 4 quarters. One year data is too short to judge a company.

Thanks,Srinivasan M
rasik mehta
Replied to srinivasan M comment 1 decade ago
EVEN HDFC MF has Aurobindo in its portfolio. so you are in ok company. unless the man says Prashant Jain doesnt know stock picking and analysis either. LOL.... he wont meet srinivasan's high expectations either. But HDFC MF is India's best managed fund with a huge research team. So moneylife in good company?? Editor, your response pls?
DR SUNIL PATIL
1 decade ago
You are right ,but some of them have been recommended by Moneylife team in Street Beat eg Nava Bharat Ventures etc. What went wrong?
R Balakrishnan
1 decade ago
Do a "sort" of companies with registered offices at either HyderaBAD, AhmedaBAD, Baroda, Chandigarh, Ludhiana.
If you blindly avoid companies out of here, you can outperform
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