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Gitanjali Gems, the Fall Guy
Feb 20, 2018


Since time immemorial, the lure of gold has seen mankind fight wars, travel across continents, and risk lives. Its "safe-haven" status during a crisis is unparalled throughout history. But did you know that there exists an iron-based mineral, pyrite, that is yellow and shiny like the real gold and is available in mass quantities?

Unlike the real gold, the mineral lookalike hardly has any intrinsic, social, or market value. However, its deceptive appearance has fooled many into believing that they have stumbled upon a gold mine, just like Gitanjali Gems, a stock that has fallen from grace yet again.

Most investors in stock markets suffer from short-term memory. The past debacles are quickly forgotten with investors making a beeline for dud stocks, only to burn their fingers repeatedly. Back in July 2013, after the stock of Gitanjali Gems had slumped on charges of market manipulation by its promoters, it was being lapped up by institutional investors hoping to cash-in the long run.

And we had stuck our necks out, warning investors that Gitanjali Gems' shiny exterior is a sham. Being in a working capital business of importing gold and exporting jewellery, regulatory restrictions on gold imports in FY13 pushed the company in deeper debt. But the company's weak management, integrity, and ethics were completely unacceptable to us. Therefore, despite Gitanjali Gems attracting institutional interest during the gold rally, we had clearly asked investors to steer clear of this value-trap.

The stock of Gitanjali Gems has nosedived on several occasions since 2013, eroding market capitalisation by over 80%. Its promoter's role in aiding Nirav Modi carry out one of the biggest frauds in the banking history has damaged the stock's position and credibility. Reportedly, Gitanjali Gems and its two subsidiaries fraudulently acquired letters of undertaking and letters of credit worth Rs 48.9 billion issued through Punjab National Bank.

It has emerged that Gitanjali Gems' receivables position has been outstanding far longer than that allowed by the RBI. Auditors have pointed out the overdue loans/debentures and overdrawn working capital limits by the company in the latest annual report. In fact, the company has said that it does not even have funds to honour debenture redemption liability of as low as Rs 14.8 m. Connecting the dots in the aftermath of the fraud undoubtedly confirms that the dubious management is responsible for the company's downfall, something we had seen coming long back. Clearly, management integrity is one aspect that shareholders cannot afford to compromise in their frenzy to ride the bull run.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - The Blueprint for Sensex 100,000

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