Raghuvir Srinivasan

Investing in stocks is not as simple and straightforward a game as it seems. That lesson was driven home yet again last week when the stock market trembled from the aftershocks of the spectacular collapse of US securities firm Bear Stearns. Though the US regulators tried to contain the impact on the global market by finding a white knight for the firm, literally overnight, the fallout on India was inevitable.

Bear Stearns was a foreign institutional investor in India with large holdings in close to 100 companies. Indeed, the firm had begun offloading its shares a week before it collapsed, sending valuations of those stocks southwards.

As a nervous market closed last week two sessions earlier than normal, the question troubling investors is: have we seen the end of Bear Stearns’ sales of its Indian investments or is there more to come?

What about other big investors who are also in a spot of bother following the credit market crisis in the US? Will they also resort to offloading some of their holdings to raise cash?

It is impossible for anyone to second guess what Bear Stearns or its knight in shining armour, JP Morgan Chase, will do about their Indian stock holdings. So investors have no protection on that count. Chances are that JP Morgan will decide to stay invested in the stocks that Bear Stearns holds, in which case there ought to be nothing to worry about.

But chances are also that JP Morgan may decide to exit those stocks to raise cash, in which case valuations would suffer. Therefore, if you hold these stocks, the ideal course may be to sell them at the first opportunity unless if you have a higher than normal appetite for risk and also the stamina to wait for the turbulence to pass.

Operation Uncover

Business Line attempted to uncover the troubled investment bank’s holdings in Indian companies by using publicly available data filed with the stock exchanges. We have attempted to uncover a major part of Bear Stearns’ investments in Indian companies (see graphics). The caveat though is that we may have missed smaller sized investments that account for less than 1 per cent of a company’s equity. These investments are difficult to track as they are not reported to the exchanges.

Besides, our analysis is based on the FII holding pattern disclosed by companies to the exchanges as on December 31, 2007. We have adjusted subsequent buy/sell trades of Bear Stearns from January 1 to date wherever data is publicly available.

As per stock exchange guidelines, brokers are required to separately disclose only those trades that:

amount to more than 0.50 per cent of a company’s equity capital or,

amount to at least 5,00,000 shares or Rs 5 crore in value

Trades of smaller sizes put through by Bear Stearns, therefore, could have slipped through our net. At the end of it all, what we have is a broad picture of the firm’s investments in Indian stocks, and this is what the picture conveys.

Curious portfolio

Bear Stearns’ portfolio is a curious mix of stocks from mid and small-cap sectors. A quick run through does not reveal any pattern in terms of industry mix or sector focus. The FII appears to have spread its money across a range of stocks with a debatable investment rationale. There are some infrastructure stocks such as Madhucon Projects, Hindustan Construction and C&C Construction, hobnobbing with the likes of small-caps such as ABC Bearings, Alps Industries and Euro Ceramics.

The securities firm appears to have studiously ignored the more high-profile stocks, even in sectors such as infrastructure.

Bear Stearns also counts a few IT stocks in its portfolio but these are again in the mid- and small-cap space such as Sonata Software, Logix Microsystems, Geodesic Info Systems and Aztecsoft. In fact, it is interesting to note that there are no large-cap stocks at all in Bear Stearns portfolio.

If there indeed are any, then the holdings may be minor, as they don’t find a place in exchange filings.

Bear Stearns started its Operation Offload on March 14 and in just three sessions– March 14, 17 & 18– it had succeeded in selling stocks of more than 65 companies that it held. The total value of its sales in this period was about Rs 1,400 crore accounting for more than 10 per cent of all FII sales.

The bank completely sold out its holdings in about 21 companies in just these three trading sessions leading to prices of those stocks plummeting sharply. (see graphic).

After the sales of the last week, Bear Stearns’ portfolio is still worth about Rs 1,700 – 2,000 crore.

High-risk stocks

There are several stocks where Bear Stearns holds more than 2 per cent of a company’s equity.

In our opinion, these are high-risk stocks for other shareholders; if there is a need to raise cash, these are the stocks that may get offloaded first by the troubled investment bank.

To say that such a distress sale will lead to plummeting prices for those stocks would be stating the obvious.

Prominent stocks in this list are those such as Panyam Cement (9 per cent), Aztecsoft (3.77 per cent), RPG Transmission(8.93 per cent), Sadbhav Engineering (5.08 per cent), Karuturi Network (7.02 per cent), Stone India (5.17 per cent) and Jyoti Structures (4 per cent).

Small/mid-cap stocks

Small-cap stocks where Bear Stearns’ holding is less than 1 per cent could still suffer in the market if the troubled bank were to offload its holdings.

This is because trading in these stocks is limited and, again, deal sizes are relatively smaller. A couple of disproportionately large sized deals in such stocks can upset the valuations.

Unfortunately, Bear Stearns’ holdings are heavily tilted to the small- and mid-cap stocks, where it holds up to 2 per cent and in some cases even higher than that.

Stocks such as Indo Tech Transformers, Jyoti Structures, Kamat Hotels, Mahindra Lifespace, MIRC Electronics, Opto Circuits, Havell’s India, Sonata Software, Thirumalai Chemicals, Lanxess ABS and Ganesh Housing are all examples.

Interesting case

The case of Spicejet is interesting. Bear Stearns, just before its collapse, held 5.72 per cent of the company’s equity, more than half of which it acquired in February 2008. Interestingly, only a month before that, in January, the bank had sold about 0.51 per cent of the company’s equity that it held at a price of Rs 94.58 per share.

On March 17, Bear Stearns sold a big chunk of 4 per cent of Spicejet’s equity and now holds about 1.69 per cent of Spicejet’s equity.

Interestingly, while the bank bought a 3.77 per cent stake in the airline in February at Rs 66.10 per share it ended up selling 4 per cent at Rs 49.25, a loss of Rs 16.85 per share.

Recent investments

Bear Stearns was an active buyer till as recently as early this month. It bought 2 per cent equity in Monnet Ispat on March 4 and 5 in two big lots at average prices of Rs 462.20 and Rs 464.95 which it sold last week. Take the case of another small-cap stock, Multibase India.

Bear Stearns bought 1.94 lakh shares of Multibase in February at an average price of Rs 42.50 and holds about 1.54 per cent in the company now. As luck would have it, the stock has appreciated and is now trading at Rs 49 but trading volumes are a few thousand a day only. The stock is bound to head south if Bear Stearns sells its holdings.

Holdings in trouble

There are other FIIs such as Credit Suisse, Citigroup and Lehman Brothers which are also trapped in the credit market crisis in the US and are in varying degrees of trouble.

There is no saying how these firms will treat their holdings in Indian stocks now.

(This article was published in the Business Line print edition dated March 23, 2008)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.