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Thursday, November 15, 2012

Modus Operandi of Bear Cartels: Zylog Systems Stock Crash!

Zylog Systems is in dramatic lower trend since past one month. For the whole of this November, Zylog Systems is crashing at market’s open and moving immediately to lower circuit limit with huge volumes. This has plunged the price to 75 Rupees at today’s market open, which is about 80% lower than 335 Rupees where Zylog was trading at just a few months back.


Rumor mills are working on overdrive and there were news reports on Margin Calls, Broker’s Selling and latest unconfirmed reports on company delaying employee salary payment as well. Of course, all this is unconfirmed. But at StockFundoo, we try to look beyond the rumors and analyze the data to try and uncover the truth. Let’s look beyond the clouds and figure out the facts for panic attacks facing Zylog stock.



Per the data filed by company to NSE and BSE today on Quarterly results and Shareholder patterns, about 51.68% of promoter’s holding is pledged as of today, which stands for 21.98% of total shareholding and is about 7,230,214 shares (Seventy two Lakh shares). Similarly, about 6,758,850 (Sixty seven lakh) promoter shares are not pledged.  The promoter shareholding, including both pledged and unpledged stands at 42.5% and remaining 57.5% is with Public shareholders and institutions.

Now, the first selling wave came from Karvy Financial which sold about 3.7 lakh shares on 18th October at 226 Rupees per share on margin call. This was not done in open market, but as a block trade. Following this selling wave, Zylog promoter’s further pledged more shares with other financers like JM Financial to stop the fall, but the market bears already smelled the blood. Bloodbath continued for this scrip which is yet to end, with share having lost 80% of its value in less than one month.

Let’s have a look at shares which are available for sale as of today, on both exchanges. With about 25,000 share worth of trade actually “executed” on both NSE and BSE for Zylog today, amount of pending shares is much higher. There are about 48 Lakh shares pending for sale on both bourses for Zylog Systems as of today. This is a monstrous figure and looks obviously fabricated unless, someone is trying to sell entire promoter pledged holding at one go. Please note that promoter pledged holding is just about Seventy Two lakh shares only.



Typically, financial institutions will carry out stock sale in tranches of few Lakh shares each, considering the small daily trade volume for smallcaps like Zylog System. So, there is definitely Bear Cartel at works here, trying to kill the share price for Zylog to further low levels and then trying to buy back the entire pledged holding at much lower prices.

How these cartel works is this: To initiate their attack, they smell companies like Zylog whose stock is trading near to its margin range. E.g. to take a example if promoter has to pledge additional stock at let’s say at 230 Rupees level for Zylog, Bears will aggressively start shorting the stock once stock nears 230.
Once margin call is triggered, promoter has no option but to either pay cash, or to keep more stocks with financers. In parallel, there are people spreading rumors about the company, which leads to panic selling among retail investors, who exit at huge loss.

Once this cycle is on, there is no end to this cycle. From past one month, synchronous bear attack has left Zylog Systems stock bleeding with about 80% loss.

Once the stock level hits abysmal low levels, such as Rs 60 or so for Zylog which is about 10-20% of its Book Value, these Bears will buy in Bulk and make a killing at the expense of promoters and common public. This cycle is repeated in Indian stock markets day in and day out for small cap companies and many promoters have lost their holdings due to synchronous bear speculative attacks. Retail public assumes it is similar case to Satyam or some other scam and runs away in panic, hence adding fuel to fire.
Per financials submitted today, Zylog is a reasonably strong company with reasonable performance in top-line and bottom-line figures for the firm:



Consolidates Revenues for the quarter is at 612 crores for the Sept quarter, which is 22% growth from same quarter last year. Profits are down at Rs 21.48 crores for the quarter and EPS is at Rs 6.53 per share.

At this EPS runrate, total EPS for the year would be at 26 Rs per share. At current price of 75 per share, P/E ratio is just below 3 for a decent midsize IT company of revenues of 2400 crores per year.
Firm is significantly trading below its Book Value of Rs 250 per share and is available at 70% discount to Book Value.

Overall, technically speaking, bear run might end at Rs 60 or thereabout, where an existing price support is available. At Rs 60, you would stand to own a 2400 crore annual revenue IT company at a paltry 200 crores market cap. This is the modus operandi of Indian Bear Cartels to attack and kill a stock and benefit  dis-proportionately from these panic attacks.

Thanks for reading this article and keep writing in to us.

19 comments:

  1. Belated, but happy and prosperous happy Diwali to you and your family.

    As usual another useful article to retail investors. You need a strong platform for sure.

    Now, your readers aware of the significance of debt free status of company and above that "quality of management".

    It is an example of how it is important to be wary of stock manipulations especially in mid/small cap companies. If these companies pledged at dangerous level, it is a sign of clear avoid.

    I have few questions. Can a company lie to SEBI about their pledging (e.g. DCH)? Is there any way to know to whom they have pledged? Under what circumstances can we consider the pledging level is safe?

    There are few more scripts that witnessed significant fall in recent months.

    1. Tulip Telecom (0% pledged?)
    2. Glodyne (repeatedly hitting LC and UC)
    3. Pipavav Defence
    4. Parsvnath Developers (91% pledged)

    and few more that are pledged at dangerous level,

    1. Gujrat Pipav Port
    2. Amar Remedies
    3. Suzlon
    4. S Kumars Nationwide
    5. HDIL
    6. Ganesh Housing
    7. Religare Enterprises
    8. Crompton Greaves (known to be nice company, but see the raise in pledging level QoQ. I am not happy with management actions past one year, kept away even when it was available at 52 week low).
    9. Gujarat NRE Coke
    10. GHCL (this was the reason I booked my profit @12% than waiting for long term)
    11. JP Power
    12. JP Infra

    and few more. Many of these companies are hammered due to falling economy and lack of liquidity.

    Some of these already hit 52 week low. So risk of manipulation?

    But consider United Sprits that pledged (to whom?) about 98% of promoter holding. It accounts approx 26% of total shares. See the price action (what ever may be the reason, there was no risk of falling price), it already reached about 2000/- level. Even when the share was available at 550/- during May, I kept away due to this pledging (no regrets, since I am following my principles of investment).

    Any comments on the above scripts. It would be helpful to the readers if you cover few of these.

    ReplyDelete
  2. Thanks Venki, pls suggest this site to your friends and colleagues.

    I will try to cover some of these scrips in next few days.

    ReplyDelete
  3. I would like to know who are the major clients of Zylog Systems Ltd. I am unable to find this information on their website.

    ReplyDelete
  4. From their profile page http://www.zsl.com/in/about-us/profile/profile you can download their company profile PDF - ZSL Corp Overview. It gives client names as IBM, GE, Metlife, Pfizer, SBI etc.
    Hope this helps.

    ReplyDelete
  5. Any comments on Glodyne and Tulip will be very helpful, as I am owning both of them in good quantity. I am in no hurry to sell and exit.

    ReplyDelete
  6. Hi Naren,
    Excellent article,i am new to your blog and have learnt a lot from this article.Thanks.
    Would like to know if you could cover on glodyne tech as it looks like a similar story.
    As i have invested and burnt my fingers in glodyne tech,would like to have your expert comments.
    Thanks.

    ReplyDelete
  7. Hi Bunny,
    Thanks. I will dig deeper into Glodyne in next few days and revert with a post. Keep visiting this site and pl also refer to your friends.
    Have a nice day,
    Naren

    ReplyDelete
  8. Very Nice Article. Now I am subscribed to your posts.

    Naren,

    As requested by other please provide details on glodyne. The upper and lower circuits are common for this stock . It was trading at 770 nov 2011(after stock split adjustment). within no time it fell to 212 in feb 2012 and rose back to 400 in May 2012 and now it is at 40.

    It this real operator player or something wrong with the management.

    ReplyDelete
  9. Great Article Naren. Very informative as how bear cartel works.

    ReplyDelete
  10. quite interesting naren....just one thing that confuses me is that is there nobody else except the bear cartel that finds value in such shares....case in point zylog.... if i invest a measly sum of 50 crores ( measly in today's context ) i stand to own 25% of a company that has an annual turnover of rs 1800 crores and makes profit of Rs 150 crores.... the market cap of such a company is just 200 crores...amazing isnt it ????

    ReplyDelete
    Replies
    1. Dear Anonymous, this is quite a interesting question, I think this can be the case, if Zylog's fundamental's are quite good & some interested party goes for it, promoters can be easily displaced at this level's.
      So i think ,promoter's should be aware of this worst case scenario when they go for pledging there shares.

      Naren, Pls you can add more on it & correct me if I am wrong ..

      Thanks
      Venkat

      Delete
    2. Yup, i saw a comment from promoter's somewhere, where he said that he has built this company brick-by-brick in last 17 years. I can feel his pain.
      Thats the power of stock markets. One can gain or lose stupendous amount of wealth in the markets, based on a few good or bad decisions.
      Often cited example, guru Jhunjhunwala came to Markets with just a few lakhs, now he has a farmhouse in Mumbai where most smart and hardworking people struggle to buy a apartment all their life.

      Markets are magical! Jesse Livermore said, its not my trading but my sitting on my positions that made me money.

      Delete
  11. This issue is loopholes of law which is drive by SEBI. I never understand what retail investor do in this situation. Promoter pledges shares in bulk deals without information. SEBI now think about this otherwise Retail investor more hurts.

    Karishma Kunder.

    ReplyDelete
  12. Hi,

    What i dont understand is the following :

    a. Did the promotor does not have atleast 100cr to buy his own share available at this market at this dead cheap price. If i assume that he doent have 100cr will he cant borrow it from the bank. At this price i think it is alright to pay interest too..With a turnover of close to 2k cr, are we saying promotor doesnt have 100cr to buyback this shares.

    b. If i assume that promotor doent have enough money and he is not able to arrange it from external parties but zylog has got the cash balance worth 100cr or more, is this amount cant be used for buyback.!!!

    c. Is nobody in this world doesnt have this money to buy this share at dead cheap price.

    d. As per the above attachment showing 40 lakhs shares are shown in selling side. who is having this much of shares apart from the promotor pledge insitution.

    e. If this dirty game is played by the bears. Then my question is cant the promotor play the same game to destroy the bear by buying the shares from the open market. This will make the bears burn their fingers because no shares will be available for them to give delivery if the promotor has got 100 odd crores to teach a lesson to the bears.

    My inner feeling says that promotor too is involved in this dirty game where the only looser is retail invester according to me....

    Pls tell me any of these points are contradicted.

    with regards

    Manoj

    ReplyDelete
    Replies
    1. Hi Manoj,

      Thanks for your comments.
      Firstly, this panic situation arose because promoter pledged his shared to borrow money from banks. So obviously he was short on money.

      Also, banks would only give you more money, if you pledge some more shares. Meaning, falling into same trap only deeper this time. Also at low market price, banks would be wary of lending more money against shares.

      Third, Bears can short without even owning the shares. This is called Short-selling, where they can temporarily borrow shares from brokerage and sell heavily, then buy back at lower price at end of the day. So that's why heavy volumes during stock fall.

      Now, if you look at internals of the stock, probably panic selling has stopped. Pls look at my later posts on Zylog, looks like long consolidation phase might have begun.

      Thanks for your comments. Keep visiting and writing.

      Delete
    2. Hi Naren

      Thank you for your reply,

      Zylog promotors has spend nearly 10cr to increase their holding from 41.54% to 42.53% during the period June to September this year. That too after the split. Average price of this share during this period is Rs.300 after split. When the same share before the split was dealing in Rs.300+ in Feb, promotors doesnt bought it at that time!!! My suspicion on them was only because of this

      If panic happened due to promotor pledging then the first script should have been united spirit which 98% promotor pledged and we think that Mr.Vijay Malya is in bad shape. Bears cant play the same game with this script...They know very well what will happen if they do.

      If promotor doesnt have money why did they spend 10cr to buy their own share at Rs.300+ after split that too..

      Now in this i think the promotor can play a bluff game with the bears by pledging the shares to show that he has got no fund.

      I am holding HDIL and bought this scipt at Rs.68/-. I am still holding it. Have done a deep analysis in this script would request your help too on this please.

      thank you once again

      Manoj

      Delete
  13. Hi Naren,

    This is my first time to your site, and am very impressed. Adding you to my reader.
    Please keep the good work.

    Regards
    Raja

    ReplyDelete
  14. Basicaly pledging, redemption, invocation of pledge, etc., are the dealings between a borrower and a lender. The Company in question does not come into the picture. Of course, the financial standing of the borrower/promoter is to some extent affected while pledging. But look at the promoters who are very rich go in for pledging. In those cases is it possibile to doub about their financial standing. Now, if the promoter and persons in management control of the Company misappropriate Company funds to save themselves from invoking pledged shares, then it is a different matter. There umpteen methods by which Company funds can be taken for individual's immediate requirements but then professionals integrity would be at stake. If any one has knowledge on the points mentioned above, please give your comments.

    ReplyDelete
  15. Hello, This is a good discussion thread and definitely thought provokes! My simple question is: if the promoter via Zylog company does not come forward to buy back shares (as per the financial statements the company has enough cash) via open market purchase then how can a retail investor have the balls to do so??? As the promoter is the best person to know the real facts of the company more than any retail or institutional investors! What stops him from doing this unless Zylog is equivalent of erstwhile Lehamn Brothers!!! I do not think it is wise to buy shares of Zylog unless we can answer this question.

    ReplyDelete

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