• JULY 26, 2013

What's wrong with Gitanjali Gems?

The stock of Gitanjali Gems share price is under the clutches of bears right now. It has fallen by almost 85% over the last two months! At the time of writing the stock had hit lower circuit.

Let us first understand the reasons for this massive fall in such a short span of time. Recently, SEBI barred the promoter of the company Mr Mehul Choksi and 26 other entities from trading in the market for a period of six months. It is believed that the promoter along with these entities was indulging in market manipulation of company's shares. This led to a huge correction in stock price.

RBI's step to curb gold imports also took a toll on share price. CARE's downgrade of its bank facilities sensing liquidity crunch further hammered the stock.

It may also be noted that 35% of the promoter's equity was pledged as of 30 March 2013. Fall in the stock price for the reasons mentioned above may have triggered margin calls. This further accentuated the fall as lenders may have started selling the shares lying with them as collateral. This is evident from the fact that promoter holding has fallen from 59.4% in March 2013 to 55.0% in June 2013.

Due to these reasons the stock has corrected by almost 85% in a short span of two months. Right now, it is quoting at Rs 85 odd from Rs 600 odd levels that prevailed in May 2013. Of course, a correction of such amount presents a buying opportunity provided the stock's fundamentals are intact. And institutional investors being better informed are considered to have a better gauge of the overall market perception.

Let us have a look at how the institutional holding of the stock has moved over the quarter. This will help us assess the market perception on the stock.

Institutional shareholding movement in Gitanjali Gems
Particulars Mar-13 Jun-13
Non Institutions 16.1%17.6%
Bodies Corporate 11.6%13.8%

It can be seen that institutional shareholding across categories has increased. In fact, over the last 4 quarters the shareholding of LIC has gradually increased from almost nil to about 5% now. This means that broader market still believes in the long term story of the stock.

However, we have a contrary belief. First it may be noted that the institutional shareholding in the stock has increased over the last 2-3 quarters due to rising gold prices. Gitanjali being a play on gold prices, led most investors to jump in on the anticipation of good returns. The fundamentals of the stock are not that encouraging either. The consolidated debt to equity (D/E) ratio of the company has been above 1x over the last five years. The return ratio's (RoE) got a push in the last two years due to increasing asset turnover. Else they were mostly in lower double digits ranging from 10-13%. Promoter pledge of about 35% also increases the risk of investment.

Lastly, it should be noted that the promoter of the company has been banned for trading for an alleged manipulation in stock price. Thus, there is a question over management integrity with stock rigging instance being quite evident. While this is not a case of fudging books like Satyam it questions the ethics of management. In the past, there have been numerous cases where stocks were beaten down due to integrity issues and have not recovered. And Gitanjali Gems could be one of them. While the broader market is trying to play over the gold story we feel that investors should steer clear of Gitanjali Gems. While the fall may excite on initial instance it could be a trap which an average investor can find very difficult to come out in future.

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