Anyone tracking Varun Industries? After being in the bull run for almost two years, the stock has been hitting lower circuits of 20% for 10-12 straight sessions. And is now down to lower than 2010 levels. The stock was 260 odd in march first week, it is at 71 now and chances of falling are higher.
The stock has consistently paid dividends and had great dec quarter results... Does anyone know if there is something in the news?
Haha
Seems like a Classic case of Fraudulent Management
Stock was trading at more than 250 a month back on 3rd March, 2012. today it is at 71
When I see such a drastic fall, First thing I check is the "No.of shares pledged by Promoters" which is available in shareholding pattern page of the Company at its bseindia profile.
ShareHoldingThe data for till last quarter shows Promoters holding 64.99% of total shares and have pledged 35.56% of their holding with Bank/NBFC or some other party. Why do the promoters pledge their shares ? For availing the loan facilities, Shares are pledged as a security. Now shares as a security is very tricky asset. The lender knows that the price of it can fall anytime and till any value, hence the margin requirement in case of shares is much more. (Minimum 200% to even 300% sometimes i.e. for borrowing 100 Rs, the promoter has to pledge shares of market value of Rs. 200 or even Rs. 300)
The terms of contracts come with a rider that if the market value of shares pledged has fallen by a particular amount say by half, the lender has right to liquidate the shares to recover his money.
Okay in this case, 35.56% is an area of concern but still Promoters have around 65% of their shares free without any pledge as on 31st December,2011 So should not be of grave concern. :grin:
Hence then I check, the announcements by the company from 31st December to current date. And what I find is, the Promoters are on the spree to pledge their shares.:o There are multiple filings for SEBI (SAST) Regulations.
Announcements The latest one I see and I am shocked, the main promoter's (current CMD of the Company) unpledged stake in the company has reduced down to mere 5% as on current date from 39% in less than a month. One more promoter has pledged some of his stake. :shock:
What can be the motive behind pledging of stake ? To avail loan against the security of shares. Promoter's hands are tied. They can't sell it in the open market, as once they sell , everyone will start selling .(If the company's CMD is not bullish about the company who else will) So they take other route, they pledge their shares and monetise their holdings.
Who better than CMD will know the financial health of his company? When CMD himself is not sure about future, he would want to be the first to get rid of his holding hence he pledges.:sneaky: As the word goes out in market, other shareholders start selling. Prices will come down to an extent that the terms of offloading in the pledging contract will become active and even lenders will start selling. In short every one will start selling and hence the stock will go on hitting lower circuits. Here in this case, I believe the stock has the potential to go to Rs. 25 in the next few months.
One more question arises to me is why the CMD is not sure about the company and how a minority shareholder like us will come to know in advance. Then I check the annual report for the last year i.e. as on 31st March, 2011. I am seeing good results , increase in sales as well as profits. Then I check the Current Assets, wherein I see huge Debtors. The sign that the company may have booked fictitious sales to boost the figures / They have recklessly sold the goods without checking the ability of customers to repay. I almost can predict that for current year , the debtors figure is going to be much worse, the company may have to book huge bad debts any time soon. :nono:
People generally believe that low PE ratio companies are very attractive. Now this company is ruling at just 3 P/E. But one should never forget that the Earnings figure is management's play. So one should not take it on face value.:nono:
Also one need not really do this much analysis, if he follows a simple principle that is "Never catch a falling knife" Never try to be smart by purchasing such stocks when they are available at considerable low prices when compared to their historical prices. There are people smarter than you who are on the other side selling the same stock.
P.S. I am bad at explaining.
P.P.S. My analysis can be wrong but I feel, the probability of it being wrong is very low
...totally my father's stock...he is expecting it to give directly the bonus this time...abhi trade to trade me chal raha ...once it gets out of it , one can expect a more bullish trend..!,..managemnt thoda investor freindly ho jaye yaar....hasnt given any dividend till now!!:nono:...since this being its silver jublee year, father expecting it to give bonus directly..lets see..
Who better than CMD will know the financial health of his company? When CMD himself is not sure about future, he would want to be the first to get rid of his holding hence he pledges.:sneaky: As the word goes out in market, other shareholders start selling. Prices will come down to an extent that the terms of offloading in the pledging contract will become active and even lenders will start selling. In short every one will start selling and hence the stock will go on hitting lower circuits. Here in this case, I believe the stock has the potential to go to Rs. 25 in the next few months. 
I don't think anyone could've given such insightful analysis.