Sunday, May 19, 2013

Wockhardt - Justified Rise or Operator Driven?

The below post has been contributed by Mr. Ankit Sandhu, a very knowledgeable technical analyst (his speciality being Elliott Waves), and a first time publisher. He believes that one of the counters in our markets is being manipulated (among many others) and he takes it up as a case study here.

WockhardtWhat a wonderful company it is, isnt it? It must be as good as gold that’s why its prices jumped from a low of Rs. 68 in 2009 to a peak of Rs.2160 in 2013.  What a spectacular bull run it has shown. The company must be worth millions now. HEY, don’t be “FOOLED” by this illusion. It’s an operator driven script but I don’t have any idea whether promoters are also involved in it or not.
It is said that everything that shines is not GOLD and everything that is too good to be true isn’t there.

Lets take a look at this company

It is a Pharmaceuticals Company. So it enjoyed growth and prosperity. The period of 2003 to 2008 was a global boom and stock markets rallied like there was no tomorrow. That was when this company got into trouble. The crash of 2008 happened and the world dipped into a recession. Wockhardt, at that time, lost millions. Its debt burden increased due to a string of acquisitions that the company had made. These included Wallis Laboratory, UK (1998), Merind, India (1998), CP Pharmaceuticals, UK (2003), Espharma GmbH, Germany (2004), Dumex India (2006), Pinewood Laboratory, Ireland (2006) and Negma, France (2007)

 This is from a newspaper article “Workhardt promoters are under pressure to raise funds as foreign currency convertible bonds (FCCBs) amounting to merely $110 million are due for redemption in October 2009. The shares of Wockhardt are trading around Rs 97.30 on the BSE compared with the conversion price of Rs 486. The stock price needs to appreciate almost five times in the next nine months to reach the conversion price, a near-impossible feat”

Its debt in 2009 piled to Rs 3,800-crore, when it approached the debt restructuring cell through ICICI Bank, in March 2009. In October 2009, Wockhardt defaulted on repaying its $110-million FCCB (foreign currency convertible bonds), making an already bad situation worse. The company was considering various fund-raising options, including the sale of Irish subsidiary Pinewood, French subsidiary Negma and the animal healthcare business and some more subsidiaries. The company had to provide fixed assets such as real estate as collateral to banks and institutions in addition to pledging their equity stake. Wockhardt's total exposure to institutions stood at Rs 1,715 crore and this included Rs 750 crore pledged to government-owned banks.

Promoters had 73.64% of shares of the company in which 40% stake was pledged with financial institutions such as Infrastructure Leasing and Financial Services (IL&FS). Then it pledged 75% of its shares to lenders and now it has 85% of its shares pledged. So this company is totally supported by its shares - all loans are taken against shares which are since then going only northwards.

This is a balance sheet comparison between its peers. If you have a look at the balance sheet, see the figures of preference share capital, reserves, net worth and total liabilities. Compare these figures with the competitors and see what you have. A huge amount of debt without any net worth or reserves to support it. As compared to the big names in the industry it has an extremely high share capital too.

Shown below is a table which shows the topline, bottom line and total assets along with the market price and market capitalization of almost all pharmaceutical companies of India. Shows how far down it is in sales and net profit in the list while the price is still up there.

Technical perspective 
So the total percentage of shares free-float in the market is 26.36% which is very easy for an operator pool to manipulate. They wouldn’t need a huge capital if the stock price were cheap.
Let’s analyse its price first:
  1. Since January 2012 when it started to rally look at its candles low… it was never broken till last 2 months. That means now there is no downward buying support in stock which really means that there are no buyers.
  2. There have been 3 rallies in this stock - first in March 2009 when operators started accumulating from public and marking these prices up, therefore, trying to attract potential sellers so that they could buy and accumulate these shares. Second rally was in June 2010 again they accumulated till there were no sellers left and volumes dried up which is common after all rallies. The third rally was in Jan 2012, that is when Nifty was falling and Wockhardt’s share price went against the trend and rallied. When all shares were falling, Wockhardt was rising so sharply that too on low volumes which is another clear sign that the pool has cornered all the stock in the market.
  3. From 2009 bottom to its peak in 2013, it had a 3153% gain that too on such low volumes.

Now let’s analyse the volumes. That is the easiest way to catch these manipulators. I have plotted the 3 types of data. First is total volume traded, second is percentage of shares delivered from total number of shares traded that month and third is total number of shares delivered.

Look at the volume spikes in this chart. Now look in the data window total number of shares traded that month where 14987889, total number of shares delivered were 4672425 that is only 31% share were delivered. That only means that prices were driven not by actual buyer but as a result of intraday buying and selling without pushing prices down that is to make people believe that something big is happening in this stock.

This is again a proof which is openly available on website, that is, they sold short first so that public would panic and sell and so on. They covered their shorts and bought some more this is how they accumulate from public.

Now this stock has been been listed in MSCI index and therefore upgrading  it as a good company to invest. Analysts are giving buy on this stock because good news has started to come. Clearly shows how deep is their analysis and how much they really do.

That is when operators sell. You see, biggest problem operators face is to dispose stock without affecting its prices which is facilitated by brokerage house by recommending it to its investors.

You can see one such recommendation here. (Note: This link is just an example of how analysts give their recommendations along with their reasons as to why the stock is looking good. The analysis is based on their views and if investors find it logical, they go ahead and invest. Not in the least, am I trying to point out that the recommendation is made in order to trap investors. In fact, this article has been written by Mr. Kunal Pawaskar, the founder of Capital Orbit, and he is a freelancer who is not associated to either Wockhardt or to any other brokerage house. Nowhere do I mean to say that this particular article was written to facilitate operators to sell their stock. If, in any way, it has hurt either Mr. Pawaskar or Capital Orbit, I apologize for the same.)

Since the prices have gone up promoters debt has been decreased which is the best disguise. They are now giving their employees stock options and are allotting more shares. What do you understand by that? This company was able to recover but their shares were their best asset which saved them from falling. There are number of other mid cap and  small cap shares that have this same story same pattern same charts eg like elder pharma (but its in its first stage that is of accumulation by operator)

Now you know why average investors always lose.

I am not a fundamental analyst. I practice technical analysis so that's where I got all my clues that’s the beauty of technical analysis any one can lie but charts never lie. 
Ankit Sandhu

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