It was an equity-market surge that seemed to defy the laws of probability: an 8,811 percent advance in just three years, topped off with 60 straight days of positive returns before trading was restricted late last month. The company, a Mumbai-listed trader of recycled paper by the name of Kushal Tradelink Ltd., transformed from an obscure Indian penny stock into one of the nation’s top 300 firms by market capitalization. Its three-year gain was by far the biggest among Asian shares valued at more than $500 million. And yet not even Kushal Chairman Sandeep Agrawal could explain exactly why.
“The stupendous rally in the stock has left everyone bewildered,’’ said Purvesh Shelatkar, senior vice president of institutional sales at Centrum Broking Ltd. in Mumbai, who recommends avoiding the shares. The advance caught the attention of market surveillance officials at BSE Ltd., which restricted daily swings and short-term trading activity in Kushal on Jan. 24. The exchange acted after identifying irregularities in Kushal’s share price, volume and trading patterns, and is keeping Indian securities regulator abreast of its findings, according to a person with knowledge of the matter who declined to be identified because the details aren’t public. The trading curbs brought an end to the stock’s winning streak, with Kushal dropping 17 percent since they were announced.
Agrawal, a Kushal founder, said in an interview he’s unsure why the stock had rallied so much. He’s still bullish on the company’s prospects, predicting a doubling of revenue in the fiscal year ending March 2018, as Kushal expands into new industries.
“We would like to purchase distressed assets in the hospitality, education and entertainment businesses,” Agrawal said in a phone interview on Feb. 6. He added that the company has responded to queries from the BSE about its business model and overseas investments. It’s unclear whether BSE or the Securities Exchange Board of India will take any additional actions on Kushal shares. BSE spokesman Yatin Padia declined to comment, while a spokesman for SEBI didn’t reply to questions sent by e-mail and text message. Agrawal says he hasn’t been contacted by the regulator.
Whether or not Kushal’s slump continues, the episode has added to concerns over unexplained swings in smaller Indian stocks. Eight of the 10 top-performing shares in Asia over the past three years are Indian small-caps, according to data compiled by Bloomberg. The BSE Brokers’ Forum, an industry group with 700 members, has urged authorities to step up scrutiny of potential market manipulators to prevent harm to individual investors. Sebi Chairman U.K. Sinha said last month in Kolkata that officials are paying particular attention to shares with rapid gains without fundamental reasons to check price manipulation. There haven’t been allegations of stock-price manipulations against Kushal.
For now, the daily price swings in the company’s shares are limited to 2 percent on the BSE. Settlement rules have also been adjusted to deter speculation in the stock, which has fallen by the daily cap for nine straight days since the restrictions came into effect.
Even after the slump, the stock is valued at 61 times reported earnings, versus a median ratio of 30 for Indian peers, data compiled by Bloomberg show. The company has a market capitalization equivalent to $895 million. It earned a net profit of 583 million rupees on sales of 8.1 billion rupees in the three months ended Sept. 30, the data show.
“Investors need to have discipline to avoid hearsay and should do proper due diligence before investing in such companies,” Centrum Broking’s Shelatkar said.