What India’s 5 Biggest Wealth Destroyers Can Teach You About Investing


But at the same time, some stocks did not benefit from the uptrend. In fact, many stocks have fallen more than 95% in the past five years.

If you had invested ??1 lakh in these stocks in 2016, you would now have a mere ??3000 to 5000.

Investing in fundamentally weak stocks and those with corporate governance issues, questionable related party transactions or heavy leverage, can cause unprecedented damage.

In today’s article, we take a look at the top stocks that have collapsed over the past five years and turned out to be the biggest destroyers of wealth. Among these battered stocks, most belong to the banking and financial segment.

# 1 Trust capital

While you might think this list would be overcome by Reliance Power, it isn’t. The company that tops the list of the biggest destroyers of wealth over the past five years is Reliance Capital.

Once a market darling, trouble began for Reliance Capital following the sudden collapse of IL & FS in September 2018.

In 2019, the Company’s credit ratings were downgraded almost every month from March 2019 to September 2019. In September, Care Ratings downgraded Reliance Capital’s credit facilities to “Care D”, implying that ‘she is at fault.

That aside, other troubles were brewing in the group. Reliance Communications was declared bankrupt in May 2018. Reliance Infra was demoted to “D” in August 2018 by India Ratings, and Reliance Naval & Engineering received an undesirable rating by Brickwork Ratings in September 2019.

Aiming for the sky, Anil Ambani argued that the companies in the Reliance group have taken on huge debts. These entities began to fail one after another and the last to fail was Reliance Capital.

Reliance Capital was unable to pay its creditors. He had little cash on his books. In June 2019, its auditor, PwC, resigned, saying he was not satisfied with Reliance Capital’s response to the financial issues he had reported.

Several defaults followed.

In December 2021, a bench in the Mumbai Insolvency Court admitted a plea to initiate a resolution process against Reliance Capital under bankruptcy law.

Thus, Reliance Capital became the fourth financial services company to be admitted to the NCLT after DHFL and two companies in the SREI group.

Negotiate at a price greater than ??850 in 2017, Reliance Capital shares are currently trading at ??13.

That’s 97% wealth destruction!

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Trust capital

The fallout from Reliance Capital has sparked debate over whether large corporations can trust banking licenses.

For now, the RBI has done well and has not agreed to open the floodgates of the bank to large industrial houses, as recommended last year by an internal task force.

# 2 Yes Bank

No price for guessing this name. You probably thought of Yes Bank when you clicked this article.

Yes The bank has eroded 94% of wealth in the past five years. In less than 3 years, Yes Bank has gone from being a darling of investors to that of an outcast.

It all started in 2017 when the RBI forced Yes Bank to disclose a large discrepancy in its non-performing loans from ??42 billion declared in the audited accounts of the bank for the fiscal year ended in March 2016.

The gap widened further to almost ??64 billion a year later. To put this into perspective, the RBI’s audit had set its total gross non-performing assets (RPA) at 5% for fiscal 2016, against the bank’s assessment of just 0.8% for the same. year.

After a year, the RBI refused to grant Yes Bank CEO Rana Kapoor an extension of his term as chief executive. Kapoor fought back, but it always felt like a battle he was about to lose.

Then came a big blow when the rating agency Moody’s downgraded the bank’s rating outlook from “negative” to “stable” citing concerns about corporate governance. For a bank, its credit rating is essential.

Yes Bank went on to raise funds from global private equity firms and investors, but all did not go well. The credibility of investors has been questioned.

As of 2019, Yes Bank recorded more losses than expected, its NPA to loans ratio swelled with its provisions.

The RBI then imposed a limit of ??50,000 on withdrawals. Then, as usual, SBI bailed out Yes Bank.

The action of Yes Bank has certainly turned out to be a nightmare for investors. It is as if the bottom line for Yes Bank’s stock has fallen.

Yes Bank.

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Yes Bank.

The Yes Bank debacle left many lessons for the Indian banking sector.

# 3 Financing of SREI infrastructures

The IL&FS debacle in 2018 resulted in a liquidity crisis in the financial sector for NBFCs like SREI Infra. This in turn affected the growth of his business.

In addition, there were problems in the infrastructure sector which led to stressing the accounts of SREI on late payments from customers.

The SREI group had planned an initial public offering (IPO) on SREI Equipment but it was suspended.

Instead, the boards of directors of the two companies decided to transfer the lending, interest-generating and leasing activities of SREI Infra along with the associated employees, assets and liabilities, as than a business in activity, by way of downward exchange to SREI Equipment.

The business was later stranded by a heavy blow due to the Covid-19 pandemic. Infra projects have stopped and borrowers’ projects have been blocked.

The RBI then conducted an audit and reported over ??80 billion of regulated loans probable by the SREI group.

Then this year, the RBI said it was enough and took SREI Infra Finance to insolvency proceedings.

From negotiation to ??Over 130 levels in 2017, SREI’s stock currently has penny stock status and is trading at ??5.

Financing of SREI infrastructures

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Financing of SREI infrastructures

# 4 Trusted communications

Another Reliance group company that is making the cut is Reliance Communications.

Long before Reliance Jio hit the scene, Reliance Communications (RCom) disrupted the telecommunications industry. When other operators billed between ??4 to 6 per minute even for incoming calls, RCom offered them free with a ??500 handsets.

Anil Ambani attracted users with an aggressive pricing strategy that was 60% cheaper than its competitors.

However, the company’s choice of technology in CDMA led it to invest capital in expanding 3G and GSM services. That’s when the trouble started. RCom discovered that CDMA services generated less revenue than GSM.

It therefore invested heavily to deploy GSM services and ended up with massive debt. Over the years the debt has exploded and RCom has not been able to reduce it due to declining income.

The entry of Reliance Jio was another trigger for RCom to finally raise the curtains on its 2G and 3G services.

RCom tried to find a solution, including a proposed merger with Aircel, but the deal was unsuccessful.

Over the past five years, the company’s shares have fallen by more than 85%.

Trusted communication

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Trusted communication

As it stands, RCom is in debt. The Department of Telecommunications (DoT) refused to renew his telecommunications license unless he paid the statutory dues of ??260 billion.

# 5 Sadbhav Engineering

Sadbhav Engineering is a construction and engineering company that develops infrastructure in the fields of canals, irrigation projects, roads, bridges, mining projects, dams, etc.

In January 2018, the company’s shares were trading on ??400. Switch to the present and the action trades within ??50. Wealth destruction of over 85%.

Sadbhav Engineering

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Sadbhav Engineering

The stock’s downtrend is in line with its results. EPC Company reported a consolidated loss of ??1.5 billion this year in the June quarter. It was his ninth loss in ten quarters.

Right now, the company is trying to survive by monetizing assets, raising funds by any means possible and staying afloat so that it can push for the recovery.

As it stands, Sadbhav Engineering has almost exhausted its working capital and debt limits.

The company raised approximately ??9.9 billion in the March 2021 quarter via the sale of a 7% stake in IndInfravit Trust. This money was used for the reimbursement of NCDs of ??6.9 billion and towards an equity commitment of ??2.7 billion for HAM projects.

What other companies have been the biggest destroyers of wealth?

Other than the above, here are some other businesses that have fallen the most in the past five years.

Destroyers of wealth.

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Destroyers of wealth.

Take-out

They are therefore the biggest destroyers of wealth of the past five years.

For individual investors, the biggest lesson to learn here is not to confuse low stock prices with low valuations. Don’t blindly buy stocks of bad stocks expecting them to bounce back to their previous levels.

When stocks start to fall and hit new lows, investors often take an interest in them, hoping for quick gains. But these types of stocks tend to drop even more, destroying even more wealth. These stocks are called value traps. They seem to offer value, but in reality they are pitfalls.

They have certain red flags such as defaults, credit downgrades, sale of pledged stocks, increased debt and low income.

You must learn to differentiate the opportunities from the pitfalls. To do this, the first thing you need to keep in mind is that just because a title is beaten doesn’t mean you have to buy it. A steady fall can actually be a sign of something sinister.

As it is said, investing is simple but not easy. Stock selection is tricky, but with the right fundamental analysis and the right margin of safety, you can be successful.

Disclaimer: This article is for informational purposes only. This is not a stock market recommendation and should not be treated as such.

(This article is syndicated from Equitymaster.com)

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