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Monday, Feb 14, 2005

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Stocks of negative net worth firms sizzle

Suresh Krishnamurthy

THAT the stock of SBI Home Finance is up 40 per cent over the past month may not strike you as unusual. What is unusual, however, is that this firm has stopped all its operations and, as they call it in accounting parlance, is not a `going concern' any more. It has run up accumulated losses of about Rs 230 crore as of end March 2004.

Even as the stock price performance of SBI Home Finance conjures up images of a casino, the markets have seen a number of stocks of firms with negative net worth registering large appreciation in prices over the past year.

Negative net worth indicates that the losses made in the course of operations have wiped out the capital invested. The average one-year gain of stocks of such firms has been 158 per cent for a set of 30 stocks with only three stocks registering negative returns.

In the case of a few stocks such as Royal Airways, Videocon Industries, Morarjee Realties and IFCI, the run up in stock prices has either preceded or followed announcements of restructuring. Stocks of a number of cement and steel firms are also part of the list.

It is possible that factors such as consolidation in cement industry and the rise in steel price partly justify the surge in prices of these stocks. Factors such as reorganisation or consolidation, however, need not completely justify the share price gains since these companies are also saddled with sizeable amount of debt.

For instance, with the stock price rising by nearly five-fold over the past year, the market capitalisation of Andhra Cement, which has a 1.4-million-tonne plant, is Rs 120 crore. The firm, however, has a debt of Rs 242 crore. Similarly, the market capitalisation of Southern Iron & Steel is now Rs 165 crore, even as the firm is saddled with a debt of Rs 942 crore. Such large debt has, however, failed to deter investors in picking up stakes in these firms. Maybe, as the SBI Home Finance case highlights, balance sheet strength may not matter if investors are relying on the `greater fool' theory to bail them out.

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