labels: investment - general, markets - general
Investors and misleading media reports news
Rex Mathew
10 October 2005

Misleading media reports often ruin small investors.

The financial media, including the business channels, deserve their fair share of blame for disseminating market rumours to the wider body of potential investors, luring them to invest in stocks when the markets are on an upswing.

Last week's incidents, which led to the crash, are a prime example small investors being influenced by media reports. Prominent newspapers, including mainstream newspapers, reported that the prime minister held a meeting to discuss the 'scam' in stock markets, where even the intelligence agencies where present.

Some papers went further and said prominent and well-established broking houses, including the subsidiary of a well-known private bank, were being investigated. Stories about overseas bank accounts of stockbrokers being tracked by intelligence agencies were also carried.

The next day, the prime minister's office denied such a meeting had ever taken place. It also stated that intelligence agencies were not watching market movements and only SEBI was involved in such investigations. The prime minister personally asked the media to exercise restraint and wondered if the time had come to penalise the media for erroneous reporting.

This is not an isolated case, as a section of the media claims. Last week, a prominent English daily carried a report on its front page that seemed to suggest that Air Sahara, the third largest domestic airline, was likely to be acquired by Spicejet, a recently launched low-cost rival,. Can a lay reader be blamed for believing the report which, by its style of presentation, seemed to imply that the deal had already been concluded?

Its sister publication, a prominent English business daily, had a different view of the story on the same day. The paper said that Spicejet was one of the suitors for the larger airline. The report further stated that Air Sahara may also consider an IPO as another option to raise additional resources to avoid a stake sale.

Imagine the dilemma of a small investor who reads only a single paper. He is informed by one of the largest, and most respected, newspapers that a deal had almost been closed, when there was only speculation about some discussions. Incidentally, the same English daily itself had reported a few months back that Spicejet was up for sale, stating that the Hinduja group was in discussions to acquire it.

The Spicejet stock is already trading at an astronomical valuation. In fact, the stock price shot up from single digits to more than Rs50 even before the company had acquired a single aircraft. The morning after the report appeared, the stock opened almost 5 per cent higher and volumes went up significantly. Later in the day, Air Sahara denied being in talks with Spicejet, but confirmed that it may consider an IPO or a stake sale to financial investors, though not a strategic sale to another airline.

Manipulative "developments"
Many financial newspapers now carry a daily column dedicated to market rumours. Some of the stories that are carried in these columns are often downright incredulous. In other cases, stories are deliberately planted on unsuspecting journalists to justify the run up in stocks, citing some 'development' to justify the jump. This attracts more punters to the stock and keeps the momentum alive.

Similarly with the electronic media. A few months back, a leading English business channel in the country invited the management of a software company, to discuss its first quarter results. This company has been declaring impressive results for the last few quarters, (something similar to Minal Engineering). However, analysts have openly stated that they were baffled by the company's figures, which seemed too good to be true.

The share price of this company doubled over the next few weeks as it became a traders' favourite, with large volumes being traded. Then the stock started tanking and went below its previous levels. For FY 2004-05, the company had reported an EPS of close to Rs25 per share, and the stock is currently trading at Rs27; a software stock with a trailing earnings multiple of just over one! Obviously, not many investors bought into the story.

The first quarter results of the company make for interesting reading. It reported revenues of over Rs100 crore and a net profit of Rs31 crore. The expense heads in the P&L account is where the action is. This 'software' company spent only about Rs1 crore as employee costs to achieve revenues of over Rs100 crore, when the industry standard is close to 30 per cent.

During the previous quarter (the last quarter of 2004-05) the employee costs were around Rs29 crore or 20 per cent of revenues. Does this mean that the company sacked 97 per cent of its employees in one quarter but somehow miraculously managed to continue delivering 'software' services?

During the first quarter of the current year, the company spent over Rs36 crore on 'raw materials' and more than Rs31 crore on 'other expenditure'. In a footnote, the company explains that raw materials are actually minority interest. Minority interest is the stake held by others in the company's subsidiaries, which are not wholly-owned.

Interestingly, the promoters held less than 8 per cent in the company as of 30th June 2005! Till 31st March 2005, they had a stake of over 18 per cent. Even FIIs traded heavily in this stock and held more than 5 per cent as on 30th June.

Normally, the channel does not give much exposure to such companies, a fact not lost on many keen observers. The advertisements did not promote the company's services but announced, among other things, having received a Rs1-crore order from a state government. The company advertised its quarterly results as well on the channel.

Another business channel invited the management of Morepen laboratories, a small pharma company, to discuss its business plans sometime back. This drug company was one of the high fliers in the last bull run and the stock had run up many times. Since then, the company has been facing serious problems with criminal cases filed against it for non-repayment of fixed deposits.

Even then, the management waxed eloquent about the $15-billion market opportunity in diabetes care. The management was confident that the company would turn around by December 2004. Six months after the TV appearance, the company's affairs have turned worse. The government has appointed its own directors on the board to protect the interests of fixed deposit holders.

What were SEBI and the exchanges doing?
Unfortunately for many small investors who were attracted to these stocks because of the rumours, announcements and media reports, the authorities acted very late. As often happens in this country, authorities took action only when the situation was already well out of control. By then, a large number of investors had already been trapped, as some of these stocks have declined considerably recently.

Apart from some isolated noises, no detailed discussions have been initiated to arrive at an enduring solution either. And the media continues spreading speculative reports The last issue of a prominent English weekly, screamed: "Sensex - Target 16,000".

One thumb rule to follow, if you are a small investor, is avoid investing in stocks of new or unheard companies that make frequent announcements. Stay away from companies showing a sudden and incredible improvement in financial performance. And take media reports, especially the speculative sounding ones, with a fistful of salt.

also see : The art of manipulating stock prices
Cleaning up the small-stocks stable

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Investors and misleading media reports