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Intelligent Fanatic Ka Stock Nahin Dubega: Investors Stay In Denial Despite Colossal Losses



A stock which is headed by a so-called “intelligent fanatic” attracted the crème-de-la-crème of investors. They ignored the warnings that were writ large and are now wailing inconsolably at the colossal losses




MMB Punters stay defiant despite Kitex Garments plunging 20%

“Sabu Jacob “intelligent fanatic” hai. Uska stock nahin dubega,” a middle-aged punter proclaimed in a defiant tone.

Several other punters at MMB nodded their heads vigorously in agreement.

“Though sentiment is in favour of shorters, Kitex may stun them towards fag end! Beware!!!” another punter observed.

“Basically there is no problem in kitek. The share value fluctuation is due to the operators game. By the coming election the share price is sure climb back to 700 levels,” yet another punter observed.

“Buy it now before it gets too late for you to enter the stock. Current Price 119, huge upside. No stop loss keep averaging on each fall,” another said.

kitex-garments

The confidence in Kitex Garments is not confined to ill-informed novices and punters.

Even distinguished value investors endorse it.

Ocean Dial’s Gateway to India Fund (which is advised by Sanjoy Bhattacharyya, the doyen amongst value investors), has two such dubious stocks in its portfolio.

The first is Manpasand Beverages and the second is Kitex Garments.

With regard to Manpasand Beverages, blame for the collapse of the stock price was sought to be shifted on the auditors with the remark “Indian auditors may be adopting a stricter line than they have historically after one of the ‘big four’ audit companies fell foul of the regulator”.

With regard to Kitex Garments, the plunge in the stock price was rationalized as being due to “de-stocking as retailers react to competitive pressure from e-commerce players” and the “shut-down of Toys R Us”.

Prof Sanjay Bakshi, the authority amongst value investors, had written a detailed note on Kitex Garments titled “The Importance of Unconventionality” in which he heaped lavish praise on the stock.

Unfortunately, the note now appears to have been either deleted or moved.

As of 31st March 2018, the Prof’s ValueQuest India Moat Fund held 14,72,235 shares of Kitex Garments.

The present holding is not known.

However, not all value investors were charmed by Kitex. Some like Ravi Dharamshi described it as a “mistake” and sensibly bolted before it could cause irreparable damage to his portfolio.

Kitex Garments Sanjay Bakshi



Sabu Jacob is an “intelligent fanatic”?

Ian Cassel of Micro-cap Club is held in esteem by the intelligentsia because of his research on multibagger micro-cap stocks.

He has endeared himself to investors because of his theory that one can make a fortune of upto $50 million from micro-cap stocks even by investing petty sums of money.

He conferred the prestigious title of “intelligent fanatic” upon Sabu Jacob, the promoter of Kitex Garments.

This move met with vehement opposition from knowledgeable investors.

However, Ian Cassel stayed defiant. He claimed that Sabu deserves the prestigious title because of “how these leaders grew their business”.

In hindsight, the decision to knight Sabu Jacob ought to have been reconsidered given the serious allegations (albeit unproved) levelled against him and Kitex Garments in the valuepickr forum and by knowledgeable experts as far back as in 2015 & 2016. (see Prof Sanjay Bakshi’s Fav Stock Falls From Grace Even As ValuePickr Forum’s Ominous Warning Rings True).

We will have to see whether Ian Cassel now strips Sabu Jacob of the title of “Intelligent Fanatic” or still stays defiant that his judgement is right.



Change in auditors implies that all is not well with the accounts?

M/s Varma & Varma, the distinguished auditors of Kitex Garments, received a generous fee of about Rs. 20 lakh in FY 2017-18 for auditing the accounts of the Company.

In the previous FY 2016-17 the fee was only about Rs. 8 lakh.

So, prima facie, there was no provocation for M/s Varma & Varma to unceremoniously put in their papers and make way for another firm of CAs named MSKA & Associates.

While M/s Varma & Varma maintained a stony silence on the reasons for their resignation, Sabu Jacob claimed that the Company had decided to go for a “much better firm” of CAs in view of some international expansion plans.

Latha Venkatesh and Sonia Shenoy, both of whom are seasoned business journalists, did not appear convinced by Sabu Joseph’s explanation if one goes by their body language.

Auditors are “running scared” and dumping dubious clients

In the recent past, we have seen auditors in three companies, namely Vakranjee, Manpasand and Atlanta, relinquishing their positions in a hurry.

Dilip Buildcon is also reeling under the suspicion that it is the “next Vakranjee” and that the auditors are putting in their papers.

8K Miles Software also plunged like a stone over auditor worries.

The seminal question as to why auditors are suddenly developing cold feet and are exiting in a hurry has been answered by Aashika Suresh and Saket Sundria of Bloomberg.

The duo has pointed out that auditors in as many as 30 listed companies have abruptly resigned in the first five months of the year.

It is claimed that these departures are because the regulators are cracking down on governance lapses and outright corporate fraud, as part of Prime Minister Narendra Modi’s efforts to recast the image of Asia’s No. 3 economy as a corruption-free place to do business.

It is also stated that because of an amendment in the law, the entire firm can be held guilty of misconduct because of the misdeeds of a single partner.

This makes it impossible for auditors to tolerate the shenanigans of their clients and to look the other way while the books are being cooked.

Conclusion

Obviously, it is beyond our intellectual competence to comment on whether Sabu Jacob is really an “intelligent fanatic” or whether Kitex Garments is a “House of Cards”. The limited takeaway is that it is better to hit the exit button at the first sign of trouble. There is no point in being defiant and holding onto such stocks specially when there are several other fish waiting for us in the pond!








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3 Comments
  1. Raven's Gravatar Raven
    July 5, 2018 at 9:05 pm | Permalink

    Good article pointing out fraud managers. Very disappointing management from the owner.

    I can only recommend TCI Express and Suven and Suprajit. Good management and great prospects.

    Reply
  2. kharb's Gravatar kharb
    July 5, 2018 at 9:06 pm | Permalink

    At least I was sure, what will happen to Kitex Stock, I had discussed that many times in this forum.

    Reply
  3. Monik Kapadia's Gravatar Monik Kapadia
    July 5, 2018 at 9:49 pm | Permalink

    Teaching Note on Unconventionality – Alpha Ideas
    PDFalphaideas.in › uploads › 2014/12 › Teac…

    Reply

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Disclaimer: This is a Fan Site in Rakesh Jhunjhunwala's name. Rakesh Jhunjhunwala is not associated with us and is in no way aware, accountable or responsible for what is stated here. Further, nothing here constiutes investment advice for you to act on. Also, we have a vested interest, and are extremely biased, in everything that we say. So Mind It!