The rise and rise of SME stocks

[Editor:  My first question is why only SME stocks? There are scrips in the large (and mid-cap) space too, which are being jacked up by TV-analysts or other market-men, without giving much reason as to why a scrip  having book value of Rs.300 should be trading around Rs.14, 000 plus or why P/E of auto sector should be so high??!! A common thing which I hear is: Market tends to give high P/E to Auto and Breweries sector. Oh yes, but then where is the limit? Also, why should stocks like MIC Electronics Ltd be hitting upper circuits? Why the shares of SKM Egg Product Ltd with a single product (like Eicher Motors Ltd)  to boast of, is trading above Rs.100? Why is the scrip of Western India Shipyard Ltd, not going anywhere inspite of improving fundamentals quarter after quarter? Why do companies like SEL Manufacturing Company Ltd, do not bother to respond to the calls of Shareholders? How does a company continue to expand without showing much profits in its books or giving any dividend (or even bonus shares, rights issue, etc) to the shareholders (PVP Ventures Ltd, Prajay Engineers Syndicate Ltd, SEL Manufacturing Company Ltd, etc)? All these needs to be probed, because without the active connivance of varies  groups, these things cannot take place. And this may include SEBI member/s too, as we saw in case of Pyramid Saimira Theatres Ltd. This article by Jayshree P Upadhyay & N Sundaresha Subramanian is informative but they should have touched the other side of the spectrum too.  It is naked truth that there is no need of any fundamental for a scrip to move up, as long as people would like to buy it--so why are all so much interested in hard-core number crunching. There is nothing called Valuation--a scrip will rise as long as people would like to buy it and take it to the next higher level-plain and simple]

December 27, 2014: In FY14, Eco Friendly Food Processing Ltd (EFPL) made a profit of Rs 1.35 crore on revenue of Rs 2.92 crore. In the past year, it was the best performer on the BSE SME exchange, having given returns of about 11 times, according to data from Business Standard Research Bureau.

Today, the food processor, with paid-up capital of about Rs 7 crore, is worth Rs 1,323 crore. At this price, its price-earnings (PE) ratio works out to a whopping 1,000.

The dizzying rise has made Delhi-based BK Sabharwal, promoter of EFPL, a crorepati. His 19.88 per cent stake in EFPL is worth about Rs 263 crore, at Rs 534 a share. Sabharwal, who runs a securities firm and is an active member of industry bodies such as the Association of National Exchanges Members of India and the Associated Chambers of Commerce and Industry of India, told Business Standard, “It (the wealth) is only notional. I have not sold a single share.” When asked about the reasons for such a spurt in value, he said, “I am in the midst of a meeting. I will call back.”

He didn’t respond to subsequent calls.

‘Multibaggers’ such as EFPL, which have raised the market-cap of the bourse to more than Rs 10,000 crore, have now come under the regulatory radar. “Sebi (Securities and Exchange Board of India) is examining if speculators and persons acting in concert are behind these huge movements in these stocks,” a source said.

According to Business Standard Research Bureau data, eight companies, including EFPL, have given returns of more than 100 per cent in the past year. Channel Nine Entertainment, up 465 per cent this year, reported a net profit of Rs 7 lakh on revenue of Rs 1.14 crore for the six months ended September. At Friday’s price of Rs 491 a share, its PE ratio works out to a whopping 8,114, if one assumes its results for the second half of the year will be similar to that in the first.

Other top performers include HPC Biosciences (up 371 per cent), Esteem Bio Organic (343.5 per cent), Sunstar Realty Development (337 per cent) and GCM Securities (216.5 per cent). Of these, Esteem Organic is also promoted by EFPL’s Sabharwal.

As of Friday, these six companies accounted for Rs 7,099 crore of paper wealth.

The other top performers of the bourse, Tiger Logistics (130 per cent) and Kushal Tradelink (117 per cent), have market capitalisation of Rs 67 crore and Rs 175 crore, respectively.

By comparison, the BSE small-cap index has gained 68 per cent in the past year, while the Sensex gained 29 per cent, riding on huge capital inflow from foreign institutional investors.

Brokers are clueless about the moves of the SME stocks mentioned earlier. Some say since the shareholders of these stocks are among the suppliers and customers of these companies, they are well aware of the fundamentals. Also, the SME exchange has a high entry barrier for investors. One broker with the exchange said, “The exchange is taking a position that if there are any complaints from investors, it will look into it. So far, it has not received any.”

An email to a spokesperson of the exchange did not elicit any response.

Courtesy: Business Standard