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Law catches up with Pentafour - Views on News from Equitymaster
 
 
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  • Nov 16, 1999

    Law catches up with Pentafour

    The income-tax department has initiated an investigation against Pentafour Software for suspected large-scale involvement in artificial sales and purchases. This was reported by a leading financial daily.

    Pentafour Software and Exports differentiates itself from its software peers on the basis of large exposure to high margin multimedia business. It has a competitive edge in multimedia due to its excellent track record and long term relationship with global multimedia companies. It is one of the few companies worldwide that can produce complete content for multimedia-based movies.

    The IT department revealed that Pentafour's involvement was discovered during the search and seizure operations of the Delhi-based SRG Infotec over three months ago.

    Pentafour is also being probed for insider trading in its shares and manipulation of financial accounts. The company's 2QFY2000 net profit rose 71% (year on year), while revenues appreciated by 48%.

    The company's officials are being interrogated by the IT officials. The company is suspected of indulging in artificial sale and purchase entries with SRG Infotec running into millions of rupees. The company's association with some other infotech (IT) companies is also being probed.

    This controversy will do Pentafour no good as it tries to correct negative management perception, which has given the company lower valuations in the stock market vis--vis its peers.

    If these charges prove to be true, the question that Pentafour's investors will be asking the company is whether it needs to rig its accounts to show profits. The company is already doing very well and two weeks ago was ranked third (behind Disney and Lucas) among global entertainment software majors. The company has bagged some prestigious contracts and has undertaken path-breaking projects. If the charges stick, it will only serve to confirm what analysts have been claiming all along, insincere management will pull down the stock.

    Market view:
    Pentafour's stock has been trading at a discount to its peers largely due to poor management perception. The latest imbroglio to afflict the company will reinforce that perception. The 'BUY' recommendation given earlier will need to be reviewed.

     

     

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