Monday, January 17, 2011

Investor view of Anil Ambani's shares revealed

A company in the business of share trading is investigated by regulatory authorities, and reaches a 'voluntary agreement' to suspend its activities for a year. Once the news breaks, its shares tank.

This is logical. But why should the shares of companies in the business of infrastructure, natural resources, telecommunications, and power get hammered when they and their promoters are restrained from trading in shares?

On Monday, January 17th, shares in Anil Ambani's companies came under severe selling pressure, following SEBI's consent order, under the terms of which RIIL, RNRL, Anil Ambani, and 4 other directors will not trade in secondary markets.

Such a development suggests that - in the view of the market - the value of these companies derived substantially from their trading in shares. This is quite unfortunate, as it lends no stability to the valuation of such companies. When an equity analyst tries to get at the value of, say, a telecom business, he looks at its market share, its Average Revenue Per User (ARPU), and trends in customer acquisition to project the company's earnings over subsequent quarters. The analyst might get the numbers right, or not, but he has a logical basis for proceeding. If, in addition, he has to build in a premium for the value the market places on the supposed ability of the company and its promoters to profit from moving money into and out of shares, this makes the entire valuation exercise fraught.

This is unfortunate for the analalyst, who is now more likely to get it wrong. It is even more unfortunate for the retail investor who bought the stock based on a flawed prediction. And, if the company, or companies, involved are substantial ones, it is unfortunate for the equity culture in the country.

1 comment:

  1. I disagree. Markets trade more on perception rather than reality.

    The fall in call ADAG stocks is not because suddenly they found something which is not real nor because they feel that buying support will dry up, its because the sentiment is weak and when the sentiment is weak, buyers are afraid to buy at bid prices and since sellers want to exit, they offer at the Ask price and hence move the price lower.

    In all the hype, what seems to be forgotten is that such a vast group has done dealings that are not commensurate with its identity. Its one thing for a small company to do, but when even the big guys do the same thing, where is the friking corporate governance.