Manoj (name changed to protect identity), 36, is the retail branch head in a multinational bank in Bangalore. He has been investing in the stock market directly since the last 5 to 6 years, and has been fairly successful. He has been investing consistently even while market correction was underway.
Manoj’s current portfolio is around Rs 7.6 lakh. In fact, his portfolio has even seen the high of Rs 11 lakh during the bull run. He has around 18 stocks in his portfolio and the exposure to Satyam is around 8 per cent at the buying price. He had bought Satyam for around Rs 320. And, later when the Maytas takeover bid was aborted and the price fell to Rs 150, he averaged it out.
Here is how he is placed now, as far as his Satyam holding goes:
Total shares: 500
Average cost: Rs 175 per share
Current market price: Rs 34.4 per share
Unrealised loss: Rs 70,300 or 80.34 per cent
What should he do now?
Manoj is now, sitting on 80 per cent losses. Despite that he should hold onto his shares.
Here's why:
1. The government has been swift to act
The government has been quick to put in place a new board to ensure continuity of business.
2. The new board is very capable
The current board comprises of well known names across the industries. There are certainly no doubts on their experience, expertise, capabilities and intentions.
The immediate task of the newly constituted board will be to find USD 120 million (Rs 550 crore) 'bridge finance'. This could be money provided either as a credit line by the Government or banking institutions at concessional rates.
Mr Deepak Parekh, who has experience in such matters, will be able to address the issues quite competently and will be crucial for tapping funds from private equity and private and public sector banks for the company. We expect that Mr Karnik will get Satyam's business back on track and Mr Achuthan will re-establish proper accounting standards in the IT Company.
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The key question: How long should he hold on?
Manoj needs to be patient. The steps by the government and the new board will take some time. I would give about 6-9 months to see if the new board proposals are working or not. Here's why it will take that long:
1. A takeover of Satyam’s business in its entirety will be challenging as there are no numbers available which can be used to arrive at any meaningful 'fair value' for Satyam’s business. A true assessment could take reasonable time.
2. The government appointed board will try and ensure continuity of business but it’ll be interrupted due to investigations launched by the Ministry of Corporate Affairs and SEBI. This means that the new clients, or those that are yet to commence with mission-critical projects such as those in infrastructure management services, may weigh a switching option.
Should he sell, if he can't wait that long?
It is advisable to sell only on pullbacks. Pullbacks are normally some spurts during bear market rallies where one sees spikes on stocks that have fallen very sharply.
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Is buying to average out cost a good idea?
The current board comprises of some well known names across the industries. However, do not add any further stocks because:
- The stock value has depleted 80 per cent from the time the (aborted) Satyam-Maytas deal was announced.
- There are doubts about the very size and scale of the company’s operations, and its murky financials.
- There are questions raised about how the company will raise cash to fund its operations
The above points tilts the risk-reward ratio against any long-term investor.
A good opportunity: To save tax
It may be a good idea to sell the shares to book a short term capital loss (if you have been holding the shares for less than one year). You can set off this loss against other capital gains and save tax.
But remember, if you do want to continue holding the shares, buy them back the same day. You should not be selling it earlier and buying it at a higher price. In volatile times there are chances that the price jumps in the period before you buy it back.
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Could Manoj have smelled a rat?
I don’t think Manoj is to be blamed. Satyam was a respected company, and that is why a large number of mutual funds and institutional investors invested in the company. Even a professional investor would be caught off guard with such revelations.
There, however, is some learning for the common investor:
1. The management background and integrity is very important while taking an investment decision. Many of these companies may survive, but they would underperform in the long term.
2. When managements take a controversial decision, try and research what is written in the media. If your research has a negative result, exit from the company. Manoj could have done that after the announcement of the proposed Maytas deal.
Ideally, whenever the management takes steps that do not look in the interest of shareholders, 'get out' is a common rule for a lay investor. The good part is that the media is very active today in enlightening the investor and a reading of articles that appear in the media can throw up some important insights.
3. Diversification into unrelated areas is, usually, not a good idea. That means, if the business is diversifying into areas other than its core operational expertise, its not a good idea.
4. Keep your portfolio restricted to fewer stocks so that you are able to spend time and research on a dedicated basis.
5. Be diversified. Most funds had a 2 to 3 per cent exposure to Satyam and thus may not be very adversely impacted.
6. A lay investor should not try to invest in a stock that is falling sharply, especially when the news is bad.
7. It maybe a good idea to start using stop losses on equities.
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