Wait Till The Worm Turns

ON three consecutive days starting October 19, 1995, the front page of one of the country's premier financial dailies carried a story on how Reliance Industries had issued fake share certificates, which were rampant in the market. Panic set in. Reacting to perhaps the harshest sort of news any company could be hurt by—the shares you were holding could be just worthless forgeries—the Reliance scrip fell by Rs 13.50, or five per cent, from Rs 268.50. With very few buyers wanting to risk being saddled with fake shares, the sellers sold. And sold. Over the next 13 weeks, the scrip fell to Rs 155—a fall of more than 42 per cent. The standard line doing the rounds of Dalal Street was: "I'm a buyer of Reliance at under Rs 100."

 Of course, it never reached Rs 100. In fact, in an about-turn that shocked the short-sellers, the scrip jumped by Rs 100 over the next 14 weeks. The company hit back saying that this was nothing out of the ordinary, that giving duplicate shares are routine when originals are lost, that the number of "fake" shares—which, anyway, the company had issued by mistake—were only 0.01 per cent of the total capital, that Reliance was a fundamentally-sound, fast-growing, blue-chip company. The market had probably missed the point.

Mr Canny hadn't. He went on and bought 1,000 Reliance shares when they'd fallen to Rs 155. Total shell-out: Rs 1.55 lakh. Today, he's a contented man: Reliance has announced 1:1 bonus issue of shares, and excellent six-monthly results. At around Rs 420 (see chart: Reliance), the value of Mr Canny's shares: Rs 4.2 lakh. A 2.7-fold increase. In less than two years. Which fund manager can match this sterling performance?

Lesson: a controversy is the best investment. With a thin—but important—string attached. Controversy is the best investment when the company mired in it is intrinsically strong. For every blue-chip company, there are a 100 fly-by-night operators: for every ITC or Tata Tea, a hundred CRBs. The strategy then should be: identify a pool of say 25 strong companies, and watch them closely. And wait for the bad news.

The world over, in the short term, stockmarkets and stock prices move more on sentiment, defying rational reasoning. This characteristic is far starker in India, where murky deals, unfounded gossip, crooked manipulations take precedence over research, fundamentals, forecasts. Moreover, the broking community's record has not always been above board.

In such a scenario, therefore, when bad news hits a company, the brokers—who largely survive on small-scale speculations—push down the price of the company faster than ever. Sentimental by nature, and prone to panic quickly, average investors follow brokers. In turn, the brokers, who short-sold—selling shares without having them in hand only to buy them later at a lower price—buy the stock cheap, making a little killing in the bargain. Then, repeat the cycle. This goes on till the point when the bad news goes out of the front pages, and the company starts its battle, giving its point of view (neglected, so far). Of course, the company's credibility is at a low, and to counter that there are campaigns.

The result: the fact that a company is sound, that the controversy might be a small one, that it probably would mean damages over Rs 1 crore to a company that generates more than Rs 100 crore as annual profits comes to the fore. The stock price retraces its trajectory. Sometimes, the controversy need not end: the analysts do all the calculations and forecasting; the markets do the rest.

Take ITC, where Mr Canny has seen a cool 2.6-fold increase in the value of his wealth. Here's how he did it. On January 3, 1996, a penalty of Rs 799 crore for excise evasion was slapped on ITC. From Rs 250 on January 1, the stock fell 24 points or 9.6 per cent. That's when he bought 1,000 shares. Soon enough, the price chart turned, and within five months was quoting at Rs 327. Just when Mr Canny was about to sell and make a tidy profit of Rs 1 lakh, fresh charges on shady deals by ITC's US-based business partner Suresh Chitalia hit headlines. The stock fell again, this time by Rs 36 or 11 per cent by end-August. That was yet another opportunity. Today, the ITC share quotes are in the vicinity of Rs 600 (see chart: ITC). Whatever the scandals hounding the company, it retains around 80 per cent of the cigarette market. Its distribution clout is unmatched, and the calibre of its managers beyond doubt. Above all, it has a vast satisfied customer base in a product category where brands generate fanatical loyalty. That was Mr Canny's reasoning.

Looking at his stupendous track record, Outlook met Mr Canny and asked him which shares he's looking at. He answered: "Asian Paints, Cox & Kings, Tata Tea and Indian Hotels." We asked him why. The predictable reply: "They're in the heat of controversy." We asked him for details. He said: "Please read the accompanying charts." And that's what we did.