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Don't Go by the Looks
Financials, profitability & price can sometimes hide the most important element that make a stock cheap...
By Vikas Vardhan | Feb 22, 2013
At the outset, what all do you look in a company? Strong financials, profitability and attractive price are some of the predictable answers. But, sometimes, all this acts as a facade, hiding the most important element which can render all the other aspects useless. Below mentioned companies too tick all the right boxes when it comes to buying and are extremely cheap too; but wait, we are not recommending them to you. But why? Because they are cheap for a reason. Read on to find out.
Geodesic | Price: Rs 23 | PE: 1.0
What meets the eye: Geodesic is engaged in providing software products which operate across platforms of landlines, mobile phones and desktops/laptops. The company has been expanding business by many acquisitions with revenue multiplying every year.
What doesn't meet the eye: Falling margins and mounting debt due to acquisitions of unrelated businesses. Also, there are questions about the utilisation debt raised from ECBs, of which $125 million is to be paid by January 2013. Paucity of funds makes it highly unlikely.
Glodyne Technoserve | Price: Rs 24 | PE: 1.08
What meets the eye: An IT company that offers technology-led business solutions, Glodyne has almost doubled its revenue every year FY06 onwards. Profits have grown at an extraordinary pace of 66 per cent annualised in the past 5 years and return on equity averages 49 per cent.
What doesn't meet the eye: The share price had taken a tumble when the lenders started selling off the pledged shares of promoters. A huge debt has been raised by acquiring overseas companies. Recently, a few companies were barred from trading when it was found that Glodyne's share price had been manipulated by them.
Navin Fluorine International | Price:Rs 293 | PE: 1.90
What meets the eye: An Arvind Mafatlal group company, it produces a range of flurochemicals. NFI's operating profit has grown at a pace of 45 per cent per annum since FY07.
What doesn't meet the eye: Funds from NFI were used to revive and restructure the group's flagship company Mafatlal Industries (MIL) in form of debt which was then writen off. However, in FY12, NFI wrote back some of the amount recovered from MIL's FY11 profit. The company has since then again turned into a loss making entity. Written back amount of Rs 74 crore has also inflated NFI's income, thus a lower PE. Also, since flurochemicals are very hazardous to the environment, any new technology as its substitute can throw the company out of business.
Tulip Telecom | Price: Rs 25 | PE: 1.80
What meets the eye: A data telecom service and IT solutions provider, it offers a host of services to enterprises. Topline and bottomline have grown at good pace of 25 per cent per annum. At first look a success story: starting with just four employees in a small room to 2,100 employees now and a presence in 1,300 cities.
What doesn't meet the eye: The promoters have pledged 92 per cent of their holdings. In August 2012, Fitch downgraded Tulip from 'Junk' to 'Default' status when it failed to redeem $97 million FCCBs. A month's extention to pay up also resulted in failure. The company has also raised $40 million to refinance old debt which is a big concern. It is considered as a speculative stock and a sitting duck for scamsters who brought down its prices in a big way in July 2012.
Uflex | Price: Rs 100 | PE: 3.35
What meets the eye: A flexible packaging company, it manufactures polyester chips, films, laminates, pouches, inks and adhesives. Revenue and profits have grown at a good pace of 22 per cent and 27 per cent. Cash from operations of Rs 753 crore seems promising against a net profit of Rs 252 crore.
What doesn't meet the eye: Promoter and ex-CMD of Uflex, Ashok Chaturvedi, was sentenced to 4-year imprisonment by CBI court in the case of land scam in 2010. Another important factor is that the company has had negative free cash flow over the past 10 years.
Vikas WSP | Price: Rs 48 | PE: 1.67
What meets the eye: A guar gum powder manufacturer which is used for technical applications such as pet food, oil drilling and textile printing. It was in news last year after a discovery in US about a new usage of guar gum.
What doesn't meet the eye: The company has had a checkered past which involves irregularities such as window dressing, failing to address investor complaints and failure to pay dividends. It was once delisted from the bourses in October 2001 (made a comeback in 2007) for suspected malpractices in the form of abnormally high margins and wrong export turnover.
Welspun India | Price: Rs 68 | PE: 3.37
What meets the eye: It is in the business of home textiles and spinning, weaving, processing, and cut-sew activities. Bed and bath in home textiles are Welspun India's primary product categories. It claims to be the largest large diameter line pipe company in the world. The revenues have grown steadily and the profits on standalone basis have grown at an annualised rate of 28 per cent.
What doesn't meet the eye: It was a loss-making company in FY12 on consolidated basis but did not disclose its consolidated figures on quarterly basis. Sebi had barred the promoters of the company from participating in the capital markets in 2010 for colluding with operators to escalate the price of shares prior to capital raising in the period from 2006-2009. Another controversy came to light in February 2011, when the company was under scanner for involvement in Anjar land scam, Gujarat.
Zylog Systems | Price: Rs 61 | PE: 1.06
What meets the eye: An IT company which offers value-added research and development, product engineering, and end-to-end product lifecycle management (PLM) solutions, Zylog Systems has experienced aggressive growth with revenues growing more than five-fold in the past few years, with profits going up at an annualised rate of 30 per cent.
What doesn't meet the eye: Zylog's management is under a cloud since many important questions directed at them have been left unanswered in the past such as delay of dividends to shareholders and the IPO money which was left unutilised for years. Also, Karvy Financial triggered selling of 3.7 lakh shares in October 2012 on margin call on account of being pledged.
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