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Anant Raj Industries: Under a cloud? - Views on News from Equitymaster
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Anant Raj Industries: Under a cloud?
Feb 22, 2011

Anant Raj Industries has attracted maximum number of queries from our clients of late. Significant price erosion has been a cause of concern for many investors. However, despite the correction we advised our investors to hold on the stock as we believed Anant Raj would be the primary beneficiary of the expected upturn in the real estate cycle. Able management, city centric focus, de-leveraged balance sheet and a low cost housing model re-assured our faith in the company.

However, recently we came across an untoward event that has raised doubts over the management integrity of the company. As per news reports, Mr Amit Sarin (Director and CEO) has been quizzed by the CBI for his alleged involvement in the 2G scam. Here, we just try to explain the entire episode and how Anant Raj Industries has been a party to it.

The 2G spectrum scam is getting murkier day by day with names of top politicians and corporate houses being unveiled by the CBI with constant regularity. During the course of investigation on the 2G scam, it is being believed that CBI has unearthed one suspicious money laundering transaction involving Anant Raj Industries. It particularly relates to a money trail of Rs 1 bn which originated from a big corporate house to Anant Raj Group. Subsequently, Anant Raj Group has been alleged to have transferred the favour to another real estate company, labeled as the prime accused. The ultimate motive and monetary benefits accruing (if any) to the company are yet to be unearthed. However, it does raise a big question on managementís perception and integrity - to which we at Equitymaster attach prime importance.

There is one more thing that has left a bitter taste in our mouth about the entire episode. The management of the company has certainly been quick enough in putting up a clarification on the BSE website. The clarification though is far from satisfying. It has of course denied taking any stock price sensitive action and also the fact that it does not have any direct or indirect connection or interest in any telecom company. Besides, it has also clarified that the group has made any or all its transactions only relating to its real estate, construction and development business. However, the management has chosen to remain mum over the most important thing of it all. The issue of the taking of money from a big corporate house and giving out the same to another real estate company. This ambiguity has certainly led us to believe that there is more to it than meets the eye.

Hence, we advise our investors to cut their losses in Anant Raj Industries at current levels as further downside cannot be ruled out. Even if the company manages to come out clean, we believe this accusation has the potential to lower the multiple that the investing community would be willing to give to the stock for quite some time to come.

It may be noted that excellent fundamentals combined with able management are the driving factors for stock prices. Any factor in isolation will fail to deliver over a longer term and Anant Raj Industries could well go on to exemplify the same. We thus advise our investors to "SELL" the stock at current levels.

We are firmly of the belief that the losses that subscribers would incur by selling the stock stand better chance of recovery in some of our recent midcap recommendations than Anant Raj Industries.

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