Why stay away from a low priced scrip despite the Fat Boys having bought it

Well friends, the Fat Boys [ for the purpose of this article let’s restrict fat boys to mean FII’s ] invested Rs. 130308.30 crores in calendar year 2010, In dollar terms, the net equity inflow in 2010 stands at $28.70 billion, above last year's $17.45 billion. This annual inflow is at record level. And obviously this money was injected into various stocks. It is very rare for FII’s to invest in stocks which have low Marketcap since their appetite is extremely voracious. . In fact, they have the wherewithal to swallow hundreds of small cap stocks and chew them dry for breakfast!

Anyway, lets look at one such small cap stock in which the FII’s have a 12.97 per cent. The name of the company is Ruchi Infrastructure Limited. Well. owning a 12.97 per cent in a company having a Marketcap of just Rs.456 crores is pretty risky. The Promotors own 52.29 per cent stake in the company. Risky in the sense that if the company does not do well who is going to buy such shares – will you ? Obviously not.

Ruchi Infrastructure Limited is primarily engaged in the businesses of storage and transportation of edible oils, petroleum, liquid bulk chemicals, agricultural products etc., in refining of edible oils and manufacturing of vanaspati. Ruchi Infrastructure Limited is having storage terminals at major ports ( Jamnagar, Haldia, Mangalore, Chennai, Cochin, Karwar etc) and at railway side terminals (Kanpur, Doraha, Jaipur, Hyderabad & Cuttack).

The 5 year topline CARG till FY10 grew at 18.28 percent whereas the bottom line CARG grew at 8.79 per cent. During Q2FY10, total Sales and PAT stood at Rs.317 crs and Rs.1.49 crores as compared to Q2FY09 Sales of Rs.315 crores and PAT of Rs.8.06 crores. Thus, bottom line of the company is down by a whopping 81.5 per cent! In FY10, the total revenues and PAT stood at Rs. 1467 crores and Rs.32 crores respectively. [ Previous FY09 figures were Rs.1173 crores and loss of Rs.11.94 crores ]

The shares of the company are trading at a PE of 17.8 and Price/BV of 2.7 considering CMP of Rs.22.25/share. [ FV Rs.1 ] The 52 week range was Rs.67/20. Though working capital management appears to be good, the company’s PAT margins are very poor and hover around 2.3 to 3.6 per cent. Besides the company’s Debt Equity ratio is 1.76.

I will not be shocked if the share price goes sliding downhill to rest in the range of Rs.15-20. So those who are clinging on to Ruchi Infrastructure need to be careful.

Perhaps if the Q3FY11 results are good then there could be some improvement in the share price and that too if the overall market turns really bullish. Else God bless the FII’s and owners of Ruchi Infrastructure.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd