Then the "Bear" struck. Due to internal problems, Bear Stearns liquidated their positions in several companies in the Indian market through their unit BSMA. While they had disposed their stake in Orchid at Rs 190 level, this lead to a dramatic slide in the company prices. In a single day the price crashed from Rs 220 to Rs 130, partly due to the sale of Bear Stearn’s stake and also due to the fire sale of stock held by financiers, India Bulls Securities and Religare.
The promoter Mr.Raghavendra Rao had pledged his personal and family’s existing stake (17%) to raise funds and purchase an additional stake of 7% in the company. As the price came down, the financiers (India Bulls Securities and Religare) of Mr Raghavendra Rao & family sold the shares in the market to safeguard their investments.
Subsequently the price languished between Rs 110-140 in the later half of March. At that time, the scrip was offering tremendous value to the shareholders and was available at a forward FY09 PE of 4 times. With a gradual recovery in the market, the script price also recovered. This week, the Ranbaxy group company, Solrex Pharmaceuticals has taken a 13% stake in the company through open market purchase. There was a 40% rise in the value of the firm in two days and the price reached Rs 247 today. Initially there were talks of a hostile takeover by Ranbaxy group but with the financial institutions taking a neutral stand, the threat of hostile takeover is not there for Orchid’s Raghavendra Rao, atleast for the time being.
What are the lessons for retail investors in such a scenario?
- Such rapid price fluctuations offer profit-making opportunities. If the company’s fundamentals have not changed, then abnormal fall in prices represent excellent buying opportunities. Value investors wait for these opportunities to pounce on it to grab equity at very attractive valuations.
- In bear markets, the volatility levels of fundamentally strong companies with low promoter holdings may be high as the company becomes susceptible to takeover threats from competitors.
- Financial Institutions will play a significant role in ensuring management stability. LIC and United India Insurance (which holds 2.8%) have refused to enter into the discussion on which group they would support in case of a hostile takeover.
4 comments:
Still i dont understand why it was in 120 range for quite some time shouldnt all other investors lap it up when nothing fundamental has changed but price dropped by 40% in a day?
I guess retail investors would have stayed off not knowing the reason for the fall other than the much publicised "bear & margin call pressures" but Institutional investors should have stepped in and corrected the price.
Now with this solorex talk the price has shot back again.
Though i did pick up some 100 shares and is sitting on a neat profit i was wondering for the absence of interest from big players.
Hi,
What you said is true with regard to buying beaten down stocks. Orchid was very tempting at 110 or so, but the fear factor prevented me from buying at that throwaway valuations.
rgds
sai
Hi Gopal,
The fact is that Institutional investors have bought this stock during the fall. You see Solrex holding close to 15% today is because they bought huge quantity when the prices were low. the average price for solrex is rumoured to be around 160-170.
The other reason is probably due to the talk of forex derivative losses for Orchid. It was rumoured that Orchid has huge derivative foreign exchange positions. Orchid management has consistently denied the rumours. I would have expected the Analysts with brokerage houses to have a handle of the open derivative positions as they have regular interactions with the management. But not the case with this one.
The previous comment from Sai amply demonstrates the fear factor among retail investors. Retail investors always has a feeling that something which is not publicly known is behind the steep fall.
Thanks Venkat for providing well researched reports.These insights will be very valuable for the prospective investors and is very easy to understand.I wish you all the best and request you to continue with these stories.
Finally one big question.Where do You find time to do all these things.It shows your multitasking capabilities
Post a Comment