Microcap Investing: How even Astute Investors Can Get Taken for a Ride
A stock market investor can only do so much of research. Even after the most comprehensive research, he or she still remains an outsider whose fate is determined by what other investors think about the company, and the company’s performance, the combined impact of which get reflected in the stock price. Investors have no control on either but the least they expect is that the management makes an honest effort to run the company and share the rewards of that effort with the shareholders. When Amit Arora, a portfolio manager, invested in a Photoquip Ltd http://www.bseindia.com/stock-share-price/photoquip-india-ltd/photoqup/526588/, listed on BSE, this is what he too hoped. But several years later he is a bitter man. 
 
Arora, chief investment officer (CIO) of Eleven Dimension Funds, had bought Photoquip at around Rs40-50 in 2011, held it for four years, and was forced to sell is at a loss. Currently, it trades at Rs15. He calls Photoquip is like a “sports utility vehicle (SUV) that is unsafe to drive at any speed. It is dangerous to buy it at any price even at Re1.” 
 
The Photoquip saga is one of deception and lies, according to Arora, a successful value investor, who lives in New Zealand. 
 
 
Photoquip makes equipment for Elinchrom Ltd http://elinchrom.com/, a Swiss company and manufacturer flash equipment and light shaping tools for professional photographers. The Swiss Company has leading market share in studio lighting for professional photographers.  The reasons Arora bought Photoquip and how he thinks he was fooled are very interesting.
 
He says his methods did not lack any research ability or scuttlebutt. “In fact, there is no industry analyst who may have done as much research as I did on one single idea, Photoquip, I am certain of that. I focussed research on this single investment for six – twelve months at an average of three to four hours a day. In fact, even Photoquip would not know about global studio equipment market as much as I do.”
 
According to Arora, he did an in depth research on Elinchrom http://elinchrom.com/ for which Photoquip made equipment in India and also sold Elinchrom products in India. He researched Elinchrom’s expansion plans, whether they would open in China or not or whether their expansion will effect Photoquip. He also studied market shares of leading global brands, globally and in India and found that Elinchrom had about 80% market share even today.
 
Arora, who invests in high quality growth companies in Asia and Africa, even did research into the family background and wealth of Photoquip promoters, the Soni family. From the information available in public domain, he found the Soni family had children studying in the US and also several past failed ventures into instant camera and printing. 
 
After sending people to trade fairs and exhibitions, Arora found that Elinchrom equipment was selling like hot cakes. He then joined professional photography discussion forums and studied their comments for many months. “In fact I could have done a diploma requiring 12 months of study easily, given the amount of time I spent research Photoquip. I learnt about top global brands being Profoto, Elinchrom and Broncolor. All European,” he says.
 
Not only this, Arora even randomly interviewed wedding photographers and published these interviews on his blog. He says, “People would contact me and say, hey that was my wedding photographer and friend. I wrote over 20 blog posts on this single idea; never since or never again am I likely to do this again. I was confident that for over 30 years Photoquip has relationship with Elinchrom and it will continue into next generation too.”
 
“In short, I got major thumbs up for a 10x PE idea. I thought this will provide me with a 50 bagger or more, and guess what I was right, absolutely bang on right. Except for the fact that promoter’s greed got the better of them and they decided to take all the money from minority shareholders and chose to not share anything with them,” Arora says.
 
He says, “The company continues to show losses for a brand that has 80% market share in India and leading share globally, despite selling its product in oversold trade fairs.” According to Arora, there is one evidence in public domain and BSE website about the promoter deals, especially about selling of Corvi, a general lighting division of Photoquip. “I was so bullish after they set up new company into LED lighting because they were much ahead of the game than biggies. Their design was very aesthetic like iPod, iPhone for LED lighting. In 2013, I increased my stake in Photoquip after browsing through www.corvi.com. This this website has changed quite a lot now. The older version of Corvi portal can be seen through web archives.
 
“However,” Arora says, “in 2016, a series of sad events started to transpire. Photoquip owned Corvi trademark as it had funded the company. Photoquip signed an agreement to sell Corvi LED Pvt Ltd along with intellectual property rights (IPR). First, Photoquip sold the stake to another India company (perhaps Surya Roshni or TBC) and recently to Munjals of Hero. Imagine that!”
 
According to Arora, Photoquip, the listed entity, is worth just Rs7 crore and yet the Munjals of Hero acquired stake in Corvi for Rs64 crore. He questions the valuation and believes that Corvi was worth several hundred crores.
 
In its annual report, Photoquip stated, "During the year under review, your Company earned an income of Rs62.45 crore as against Rs101.52 crore in the previous year, a decrease of 38.48% as compared to the previous year primarily on account of discontinuance of LED division and decrease in exports turnover during FY2015-16."
 
Arora says, “While the owners of Photoquip earned in crores, minority shareholders lost money. I believe that Munjal's of Hero and owners of Elinchrom (mother of Photoquip proverbially) are in the dark about the acts of Photoquip promoters.” For the quarter to end-June 2017, promoters and promoter group held 53.99% stake in Photoquip, with public holding the rest. 
 
“Lesson for my fellow investors is, to repeat the quote from legend, ‘if the management does not have integrity, then their intelligence and energy will kill you’. I would be thrilled if this message can reach a wider audience and this company and its promoters can be added to investors red flag bucket,” Arora concluded. 
 
Moneylife sent emails to Photoquip management, which remained unanswered till writing this report. We will update this story with their response as and when we receive it. 
 
Photoquip ended Tuesday 9.33% higher at Rs16.4 on the BSE, while the 30-share Sensex closed the day marginally higher at 31,291.
 
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    COMMENTS

    Rahul

    2 years ago

    Thank you so much for sharing it. Proves that a good business but bad promoters is a loosers game.

    Tejas Chachcha

    2 years ago

    Excellent case study. I guess the people who are debating over whether it's a gap in the analysis, I believe the artical is making the very point that how dear missing the evaluation of promotors integrity costs. Look at the story of Gujarat Automative which is another page of the same chapter.

    monik dharamshi

    2 years ago

    Eye opener, again before investing....one has to know the integrity of the promoters, auditors...etc...very important or rather most important. However big or small a company...if a small or common investor has to benefit or earn....it is only through Promoters...integrity and corporate governance...that goes a long way...

    Manish Dave

    2 years ago

    I know Amit Arora since long time and is dear friend of mine. He certainly missed something in Photoquit and I also lost some money there. But... But, Then if you don't want to buy Photquip, u won't buy Relaxo and Symphony and some more at very very initial state. Those stocks are up I don't know how many times(May be 50 or even more)!!! It is risk with microcap. But rewards are massive. I made money with Relaxo and Symphony. I won't mind a loss, sometimes even massive loss if risk rewards looks favorable. Spending time, I didn't count hrs, but Amit would have spent same time with Relaxo and others. It is about your style. We all make mistakes and learn. Sometimes, mistake is in hind sight.

    Sunil Rebello

    2 years ago

    It is not only the microchip or mid cap stocks that can take a investor for a ride, even large caps will do the same if they can.
    no company or business is safe.
    that is why investing through 5 star Mutual Funds - directly are the best.
    Value Research, Moneycontrol, Moneylife advise is the best for advise.
    also if you are choosing Dividend payout, track that you receive the dividend. here also you can get gypped by your laziness.

    Aam Investor

    2 years ago

    Thanks ML for bringing excellent insight on investing in unknown microcap stock. Appreciate Amit for excellent writeup. Amit I am sure if promoters don't send warning letter to ML then your apprehensions are correct and these kind of promoters should be investigated by not only SEBI but also from IT dept and other allied agencies as they are not only duping small retail investors but also hiding income and doing Tax theft. All the best.

    Ramnath Prabhu

    2 years ago

    How do was the cash position during these times? Anyways it's always better to go with known names with steady growth than running after looking for next multibagger

    Ajay Sharma

    2 years ago

    After doing so much research (500-1000 hours according to the article!) this is more a failure of the investor than of the company. As a fellow investor I fully understand that 'unforced' errors are just that - unavoidable, but this was 100% a 'forced' error. Some notable investors go so far as to prioritise the quality of management above all else, even if that means foregoing a '50-bagger' because all profits flow from the actions of people. With 20 blog posts(!) this investor was clearly trying to convince himself that knew more than he did not know.

    REPLY

    Amit Arora

    In Reply to Ajay Sharma 2 years ago

    Agreed, it is the failure of the investor. Just like a wife who gets murdered by her husband after their 5th marriage anniversary. Wife was no smart enough to find out in the first five years how evil her husband was.

    Ajay Sharma

    In Reply to Amit Arora 2 years ago

    I'm not sure that example is good comparison. If the wife had reason to believe ex ante that the husband would be abusive, and if the wife then believed that the risks of staying < the rewards of staying, then I would agree that she is primarily at fault. A small

    Ajay Sharma

    In Reply to Ajay Sharma 2 years ago

    Cont: A small company with

    mahendra jani

    2 years ago

    greate article i generally look at 10 year free cash flow if it is positive then win chance become high

    Prem Bhat

    2 years ago

    Very good case study stressing importance of promoter integrity in managing business (easier said than done during investor research).

    Thanks Amit & ML team for providing & sharing wonderful insights for the greater cause of investor awareness.

    Ravindra Shetye

    2 years ago

    The very first thing to find out is the Honesty of the Promoters. Normally in the Company's area of activity, the Promoters' integrity is known. But, especially in case of small cap Companies Knowledge about Integrity of the Promoters does not travel too far.

    Amit Arora

    2 years ago

    Thanks Moneylife team for shining the light of truth and keeping up the cause of Aam Aadmi investor.

    REPLY

    Ajay Sharma

    In Reply to Amit Arora 2 years ago

    This article (and your comment) have it wrong. This article should have warned of the folly of investors computing expected value with such asymmetric odds. Nobody forces investors to invest, they play the game knowing full-well what the rules are and what they risk. Did the company do something wrong? If yes, then they should be taken to court. Should the quality of management have been assessed before hand? Obviously.
    P.S. Are you the Amit from the article?

    Yogi Bhatia

    In Reply to Ajay Sharma 2 years ago

    u r shootiya

    Amit Arora

    In Reply to Ajay Sharma 2 years ago

    Before writing such statements, have you computed the hours an ordinary working, busy family man, with lots of personal responsibilities and a full time job, will spend? "Did the company do something wrong? If yes, then they should be taken to court."

    Ajay Sharma

    In Reply to Amit Arora 2 years ago

    But that is my point, Amit. The rules of the game are known to all before they play. Especially here in India, where promoter foul play is widely known to exist, extra care must be taken. The time taken to initiate legal proceedings given concrete evidence will certainly be less than the 500-1000 hours spent forming the investment thesis in first place.

    Amit Arora

    In Reply to Ajay Sharma 2 years ago

    Court proceedings may happen over time.

    Shivram Ramakrishnan

    In Reply to Ajay Sharma 2 years ago

    If anything this article reiterates why it is important to diversify. It is stupid to blame the investor for the promoters faults. Its like saying girls are molested because they dont dress proper. Rules can and will always be changed. It is important the right arguments are placed so that action is against those who are at fault rather than the victims who were not more vigilant.

    Shivram Ramakrishnan

    In Reply to Ajay Sharma 2 years ago

    I think you are focussing on the wrong issue. The key takeaway to an investor should be diversification. To blame the investor for the mistake of a promoter is like blaming a molested girl for dressing "improperly". No doubt the victim in both cases have to be more vigilant, but key discussions and focus should be on punishing the errant party so that the future society is safeguarded. To call it the "rules of the game" will not be correct.

    Yogi Bhatia

    In Reply to Amit Arora 2 years ago

    Really a great article, my father was sub-broker in 1965, I learned from him. He always said look at the promoters family values before investing. Same thing...once a crooked always a crooked...in genes.

    Amit Arora

    In Reply to Yogi Bhatia 2 years ago

    Dear Yogi, Thanks for sharing your experience. I am learning the hard way. Finding that the jockey of the horse is even more important in small companies. While in big companies like P&G, Unilever there are adequate forums to provide a venue to protect the interests of minority , however in small companies, there are no such avenues. So, the ethical, moral values and personal drive of promoter family matters even more. Best regards

    Indian Hotel shareholders must question value destroying acquisitions: Cyrus Mistry
    Cyrus P Mistry, the ousted Chairman of Tata Group, has raised questions on acquisition carried out by Indian Hotels Co Ltd (IHCL), which runs the Taj Group of hotels, over the past 10 years. "...a company may make strategic errors as part of their journey. But when one has a consistent pattern of value destroying strategic decisions, all being defended blindly with vague assertions, it is indeed time for shareholders to question," the Office of Mr Mistry said in a statement.
     
    "Over the last 10 years the fact is the following strategic decisions have destroyed economic value, like Sea Rock, The Pierre (New York), B-jets, Taj air, Taj Boston, Taj Campton place, IHMS in South Africa, Orient Express Hotel and Ginger," the statement says, adding, "The company has faced a near-death experience and over the last four years has had to take write-downs amounting to nearly its entire net worth. Dividends to the shareholders have been impacted and these decisions have put the welfare of the employees at risk."
     
    In its annual report, the Tata Group company, had termed, its ousted Chairman’s observations as 'incorrect and careless', especially about leasing The Pierre, a luxury hotel in New York, and acquisition of Sea Rock hotel in Mumbai. 
     
    However, the Office of Mr Mistry called decision to lease The Pierre as 'onerous'. It says, "The (Director's) report tries to explain this action and some of the pre-2008 transactions as being adversely impacted by the economic slowdown and bad timing. It also talks about this as a strategic acquisition to build the Taj Brand in the US market, which is a feeder market for India. This is incorrect and hardly explains evident acts of mismanagement."
     
    According to the statement, IHCL ended up spending over $100 million on renovation, multiples higher than what was originally planned at the time of acquisition of The Pierre. "Four Seasons having a stronger brand in the US was the original lessor of the Pierre Hotel. It was common knowledge before acquisition by IHCL, in the years prior to 2008 when the US market was strong, that the Four Seasons continued to lose serious money in running the Pierre hotel. Today the revenue of the Pierre Hotel has recovered to its pre- 2008 levels and so has the economy come out of recession, and yet it continues to suffer significant losses."
     
    "The strategic rationale for acquiring the Pierre hotel to establish the Taj Brand is questionable, especially since the brand architecture executed gives significance prominence to the 'Pierre' and is presented as 'The Pierre, A Taj Hotel'. Admittedly, the lease has been extended with the exit option not 10 years from the original date of acquisition but 20 years from the acquisition date," the statement from Mr Mistry's Office says.
     
    In case of acquisition of Sea Rock in Mumbai, the price paid by IHCL was too high, the statement says, adding, "Sea Rock indeed is a property that has strategic value to IHCL and will create value only over the very long term. However, the price of purchase was evidently way too high. Besides, regardless of the 2008 crash, which occurred later in time, this acquisition was housed in an off-balance sheet structure and upon folding it into IHCL, a large impairment has had to be acknowledged. Again, this is borne out by both facts and figures. It would be pertinent to note that Bandra section 21/134 ready reckoner rate that would be a good surrogate for property prices in this area would have more than doubled over the same period despite the so-called 'black swan event' of 2008. One more data point to suggest an overpriced acquisition."
     
    Here is the statement issued by the Office of Mr Mistry...
     
     
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    COMMENTS

    Mahesh S Bhatt

    2 years ago

    BOSS is always Right but FACT IS OTHERWISE.Sales Guys are always questioned Nobody questions the Procurement Guys for buying high costs products & services except Reliance procurements are pathetic,Sales is usual target But now with Sikka/Mistry we see Infy & Tata's fighting courts after 75 what a Career change to Courts God Bless their Moha in Maya God also cannot save them but God Bless them & give sanity to RETIRE Mahesh Bhatt

    BSE to delist 200 companies from its platform
    Stock exchange major BSE on Monday said that it will delist 200 firms from its platform from August 23.
     
    According to the BSE, stocks of 117 companies that have remained suspended for more than 10 years would be "delisted from the platforms of the exchange" with effect from August 23, 2017.
     
    Besides, the scrip of 28 companies that have remained suspended for more than 10 years and are "under liquidation" would also be delisted from August 23, 2017.
     
    In addition, 55 companies would be delisted from the platform of the exchange, with effect from August 23, 2017 "pursuant to order of the "Delisting Committee of the Exchange".
     
    The stock exchange major pointed out that as per regulator SEBI's delisting regulations, 2009, the securities of these 200-odd companies would cease to be listed and traded on the BSE's platform.
     
    "Promoters of these delisted companies will be required to purchase the shares from the public shareholders as per the fair value determined by the independent valuer appointed by the exchange," the BSE said in a separate notification.
     
    "Further, in terms of regulation 24 of delisting regulations, the delisted company, its whole-time directors, promoters and group companies shall be debarred from accessing the securities market for a period of 10 years from the date of compulsory delisting."
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
      
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