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5 Penny Stocks that Could Go Bust in 2023

Oct 28, 2022

5 Penny Stocks that Could Go Bust in 2023

Penny stocks are treasured among investors. Their low price and potential to give high returns in a short span of time are what makes them investor favourites.

Hence investors are always on the lookout for fundamentally strong penny stocks, which are not only a good short-term bet but also add value to the portfolio in the long term.

But penny stocks are one of the riskiest categories of stocks. Their low liquidity makes them very volatile, which can quickly wipe out investors' money.

Moreover, the fundamentals of many penny stocks are not reliable. Here is a list of penny stocks that could go bust in 2023.

#1 A2Z Infra Engineering

First on our list is A2Z Infra Engineering, an engineering service company.

It offers engineering, procurement, and construction (EPC) services to the power and telecom sectors.

The company also builds power generation projects and offers its clients facility management services and waste management services.

It has a very reputed clientele which includes big names such as NHPC, NTPC, Power Grid, Shopper's Stop, and Birla Sunlife.

However, the company has been defaulting on its interest and debt obligations for the past few years.

Its revenue reduced to half in the last three years and declined by 20.1% CAGR (compound annual growth rate), mainly due to a fall in economic activity led by the pandemic.

However, despite improving economic activity, the company couldn't cope well. It reported a net loss of Rs 1.6 bn for the financial year 2022 against a net loss of Rs 0.7 bn the previous year.

Its total debt-to-equity ratio for the financial year 2022 stood at 2.5x, and the interest coverage ratio is below zero.

In the June 2022 quarter, the company saw its revenue increase by 8% year-on-year (YoY) as it bagged a long-term order from an Airtel group company. It also reported a net profit of Rs 11 m for the quarter due to lower interest expenses.

But a high debt on its books is causing a dent in its liquidity. Though the company plans to repay its debt soon, it remains to be seen how it will fulfil its debt obligations.

To know more about A2Z Infra Engineering, checkout its factsheet.

A2Z Infra Engineering Financials

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue (Rs m) 7,516 8,880 7,280 4,405 3,709
Revenue Growth (%)   18.1% -18% -39.5% -15.8%
Net Profit (Rs m) -874 2,970 -2,768 -770 -1,657
Net Profit Growth (%)   NM NM NM NM
Debt-to-equity ratio (x) 1 0.1 0 0 0
Source: Equitymaster

#2 Inspirisys Solutions

Second on our list is Inspirisys Solutions, an information technology company.

It offers enterprise infrastructure, cloud, security, the internet of things, and product engineering development services.

The company's key verticals include banking and finance, manufacturing, telecom, and healthcare.

Though the company has a high and experienced promoter holding (70%), it has been performing poorly for the last few years.

In the last three years, the revenue has declined by 9.5% CAGR due to a drop in revenue across various verticals. The net losses also expanded from Rs 29 m to Rs 133 m in the last year due to loss-making segments.

The debt-to-equity ratio stood at 132.6x in the financial year 2022.

In the June 2022 quarter, the revenue declined and fell by 10.1% YoY. The company's profitability continued to decline.

Going forward, only a fall in debt levels and improvement in revenue and profitability will help the business survive in the competitive IT business.

To know more about Inspirisys Solutions, checkout its factsheet.

Inspirisys Solutions Financials

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue (Rs m) 5,157 5,539 4,683 4,091 3,470
Revenue Growth (%)   7.4% -15.5% -12.6% -15.2%
Net Profit (Rs m) 121 7 24 -29 -133
Net Profit Growth (%)   -94.2% 242.9% NM NM
Debt-to-equity ratio (x) -1.1 -4.4 3.3 0.2 3.4
Source: Equitymaster

#3 Maxheights Infrastructure

Next on our list is Maxheights Infrastructure, a real estate development company.

The company is engaged in building, developing, and promoting residential, commercial, and retail properties. It also offers maintenance and recreational services.

Apart from real estate, it also offers vehicle financing services.

In the last three years, the company's performance has been deteriorating. Its revenue fell by 47.7% CAGR due to a fall in real estate income.

The company also reported a net loss of Rs 15 m against a profit of Rs 14 m two years ago.

Its debt has been steadily increasing, and its debt-to-equity ratio stood at 2.6x for the financial year 2022.

Going forward, if the company can increase its revenue and reduce its debt, there are chances for its survival.

To know more about Maxheights Infrastructure, checkout its factsheet.

Maxheights Infrastructure Financials

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue (Rs m) 601 459 440 131 63
Revenue Growth (%)   -23.6% -4.1% -70.2% -51.9%
Net Profit (Rs m) 16 17 14 9 -15
Net Profit Growth (%)   6.3% -17.6% -35.7% NM
Debt-to-equity ratio (x) 1 1.5 1.3 1.6 1.8
Source: Equitymaster

#4 Sadbhav Engineering

Fourth on our list is Sadbhav Engineering, an infrastructure company.

It provides infrastructure services such as maintaining, operating and transferring bridges, roads, and canals on a BOT (build, operate and transfer) basis.

The company has an established construction record and has completed more than 8,400 km of lane road projects.

But in the recent past, the company has been delaying executing its hybrid annuity model (HAM) projects. The projects that were due to be completed a couple of quarters back are still under execution.

Moreover, the company has planned to address its liquidity issues through stake sale of its projects. But a delay in the receipt of the sale proceeds has tightened its liquidity position.

This resulted in the delay of debt repayments. It could only partially repay its debt obligations in June 2022.

In the last three years, Sadbhav Engineering's revenue declined by 9.9% CAGR due to delays in project execution. It has been reporting losses for the past two years, which have tripled in the past year.

Its total debt to equity stood at 7.7x in the financial year 2022, and the interest coverage is 0.2x indicating a strained liquidity position.

The promoters have also pledged 88% of their shares in the company.

Despite an increase in the revenue by 18% YoY in the June 2022 quarter, the company reported a net loss of Rs 2bn due to high-interest expenses.

Going forward, on-time receipt of sale proceeds and no delay in the execution of projects can help the company turn around its business.

To know more about Sadbhav Engineering, checkout its factsheet.

Sadbhav Engineering Financials

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue (Rs m) 50,935 55,046 38,622 25,973 28,277
Revenue Growth (%)   8.1% -29.8% -32.8% 8.9%
Net Profit (Rs m) -1,140 -541 11,062 -2,374 -7,284
Net Profit Growth (%)   NM NM NM NM
Debt-to-equity ratio (x) 9.5 11.6 3.5 3.7 3.7
Source: Equitymaster

#5 Yaari Digital Integrated Services

Last on our list is Yaari Digital Integrated Services, a digital platform.

It launched a social commerce application called Yaari, which is a digital marketplace that enables small businesses to start their business through social media platforms such as Facebook and Instagram.

The company, along with its subsidiaries, also offers management and maintenance, and equipment renting services in India.

Its revenue fell by 16.2% CAGR in the last three years due to low orders. It has also reported losses for the last three years due to high operating expenses.

The company has pivoted from B2B (business-to-business) model to a B2C (business-to-customer) model and announced a country-wide sale to increase its customer base.

It even spent a whole lot of money on the sale. But it didn't translate into big numbers due to operational inefficiencies. The company couldn't deliver orders to its customers due to a lack of funds.

Yaari Digital is also heavily dependent on debt to fund its operations. In the last three years, its long-term debt grew almost 20 times from Rs 259 m to Rs 5,562 m.

As a result, its debt-to-equity ratio also went up from 0.1x to 2.4x in the last three years.

To cut down on its expenses, the company laid off its employees. As a result, its profits improved slightly in the June 2022 quarter.

To know more about Yaari Digital Integrated Services, checkout its factsheet.

Yaari Digital Integrated Services Financials

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue (Rs m) 2,651 3,496 3,480 2,472 2,046
Revenue Growth (%)   31.9% -0.5% -29% -17.2%
Net Profit (Rs m) 79 781 -2,932 -877 -1,738
Net Profit Growth (%)   888.6% NM NM NM
Debt-to-equity ratio (x) 0 0.2 0.1 0.2 2.4
Source: Equitymaster

Investment Takeaway...

No matter how attractive penny stocks look, they are very risky.

When the markets fall, the shares of penny stocks can go down by 80-90%. Only fundamentally strong penny stocks tend to survive.

The rest struggle to survive like the ones mentioned above.

Therefore, before you plan to invest in penny stocks, checkout the important facts about Indian penny stocks, multibagger penny stocks, and how to avoid toxic penny stocks.

Also, remember to checkout the ultimate guide to penny stock investing.

Happy Investing!

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