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The curious case of SME stocks

By Jayshree P Upadhyay & N Sundaresha Subramanian
December 27, 2014 08:52 IST
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Sebi is examining if speculators and persons acting in concert are behind the huge movements in these stocks

In FY14, Eco Friendly Food Processing Ltd (EFPL) made a profit of Rs 1.35 crore (Rs 13.5 million) on revenue of Rs 2.92 crore (Rs 29 million). In the past year, it was the best performer on the BSE SME exchange, having given returns of about 11 times, according to data from Business Standard Research Bureau.

Today, the food processor, with paid-up capital of about Rs 7 crore (Rs 70 million), is worth Rs 1,323 crore (Rs 13.23 billion). At this price, its price-earnings (PE) ratio works out to a whopping 1,000.

The dizzying rise has made Delhi-based BK Sabharwal, promoter of EFPL, a crorepati. His 19.88 per cent stake in EFPL is worth about Rs 263 crore, at Rs 534 a share. Sabharwal, who runs a securities firm and is an active member of industry bodies such as the Association of National Exchanges Members of India and the Associated Chambers of Commerce and Industry of India, told Business Standard, “It (the wealth) is only notional. I have not sold a single share.” When asked about the reasons for such a spurt in value, he said, “I am in the midst of a meeting. I will call back.”

He didn’t respond to subsequent calls.

‘Multibaggers’ such as EFPL, which have raised the market-cap of the bourse to more than Rs 10,000 crore (Rs 100 billion), have now come under the regulatory radar. “Sebi (Securities and Exchange Board of India) is examining if speculators and persons acting in concert are behind these huge movements in these stocks,” a source said.

According to Business Standard Research Bureau data, eight companies, including EFPL, have given returns of more than 100 per cent in the past year. Channel Nine Entertainment, up 465 per cent this year, reported a net profit of Rs 700,000 on revenue of Rs 1.14 crore (Rs 11 million) for the six months ended September. At Friday’s price of Rs 491 a share, its PE ratio works out to a whopping 8,114, if one assumes its results for the second half of the year will be similar to that in the first.

Other top performers include HPC Biosciences (up 371 per cent), Esteem Bio Organic (343.5 per cent), Sunstar Realty Development (337 per cent) and GCM Securities (216.5 per cent). Of these, Esteem Organic is also promoted by EFPL’s Sabharwal.

As of Friday, these six companies accounted for Rs 7,099 crore (Rs 70.99 billion) of paper wealth.

The other top performers of the bourse, Tiger Logistics (130 per cent) and Kushal Tradelink (117 per cent), have market capitalisation of Rs 67 crore (Rs 670 million) and Rs 175 crore (Rs 1.75 billion), respectively.

By comparison, the BSE small-cap index has gained 68 per cent in the past year, while the Sensex gained 29 per cent, riding on huge capital inflow from foreign institutional investors.

Brokers are clueless about the moves of the SME stocks mentioned earlier. Some say since the shareholders of these stocks are among the suppliers and customers of these companies, they are well aware of the fundamentals. Also, the SME exchange has a high entry barrier for investors. One broker with the exchange said, “The exchange is taking a position that if there are any complaints from investors, it will look into it. So far, it has not received any.”

An email to a spokesperson of the exchange did not elicit any response.

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Jayshree P Upadhyay & N Sundaresha Subramanian in New Delhi
Source: source

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