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Saturday, November 3, 2012

Are you Investing by Listening to TV Analysts?

There are many analysts whom you see oftenly coming up on screens with their stock picks and P. N. Vijay is one of them.

P. N. Vijay was confident about his pick when he announced Zylog Systems as his multibagger stock pick on 10th February 2012. “This is a stock that Obama will like“, he said with pride in his voice. “Its a bit different from all other I. T. companies like Infosys and TCS“, he said. “It has an excellent billing rate of $58 per hour“, he added.

P. N. Vijay was also impressed by Zylog’s performance in FY 2011-12 and he expected it to close the year with an EPS of about Rs. 100. “Zylog will get re-rated and has a price target of Rs. 1100 (Rs. 550 after the stock split) in 12 months“, P. N. Vijay said.

On that date, 10th February 2012, Zylog was quoting Rs. 245 (adjusted for split). Today, 2nd November 2012, it closed at Rs. 120, after consecutively hitting a series of lower circuit breakers. The loss: A whopping 51%!

Interestingly, after P. N. Vijay’s stock recommendation, the stock soared to a high of Rs. 328 on 2nd May 2012 and went on to touch Rs. 340 on 9th July 2012 in the wake of the stock split announcement.

Also interestingly, P. N. Vijay disclosed that he was Zylog’s “financial adviser“. Did P. N. Vijay have no inkling at all that something was not right with Zylog or its promoters?

Was this a classic “Pump & Dump” story?

The problem appears to be that the promoter company, Sthithi Insurance Services Pvt Ltd, has pledged 54.41% of the shares held by it (22% of the total promoter holding). Disaster struck all of a sudden on 18th October when Karvy Financial Services suddenly dumped 3.73 lakh shares at the price of Rs. 226 per share. Apparently, Karvy had made a margin call which had not been honoured by the promoter. That heavy selling triggered off the lower circuit filter. After that, every single day was met by heavy selling, either by Karvy or by the other lenders of the pledged shares, including JM Financial.

Nervous investors, scared out of their wits, also tried to bail out, worsening the situation. Though Sripriya Srikanth, of the promoter group, valiantly bought 1,78,200 shares, it was of no avail in stemming the steep slide that the stock suffered.

Sudarshan Venkatraman, Zylog’s Chairman & CEO, issued a statement that attributed the stock price fall to “panic” created by speculators. “Promoters and large institutions have increased their share holding over the past two weeks, coinciding with the fall in the share price.” He said there was no adverse impact on the company’s business.

Sudarshan Venkatraman’s statement is not convincing at all having regard to the ground realities of heavy selling by Karvy & J. M. Financial.

Sudarshan Venkatraman preferred not to say why the promoters had borrowed so heavily by pledging the shares of Zylog. The borrowed funds have not been used for Zylog. So, what were they used for? Also what is the promoters current position? Do they have the funds to arrange for funding the margin requirements.

Investors who are tempted to dip their toes into Zylog must remember that the total shares sold so far by Karvy, J. M. Financial and other lenders is only a fraction of the total shares pledged by the promoters. If more of the pledged shares enter the market, who knows where the carnage will end?

One of the important factor to look at is the % of pledged share by Promoters. This can make stock a risky bet if lenders decide to offload the shares like what Karvy and JM Financial did recently in case of Zylog Systems.