How come ace investors turned a blind eye to dangers which novice investors could spot?
One aspect that is perplexing is why the so-called savvy investors stayed invested in Noida Toll Bridge despite the several alarm bells that were clanging for a long time.
In fact, even an ultra-novice investor like me could sense that there is danger all around and investors should bail out and salvage what they can.
In my piece of July 2015 titled “Ace Value Investors Face Flak For Backing Noida Toll Bridge Inspite Of Strong Anti-Toll Sentiment In Country”, I pointed out that there is a strong “Anti-toll” sentiment amongst citizens and political parties and that the business model is not sustainable.
In fact, over the past several years, Noida Toll Bridge has itself been a victim of several anti-toll protests by leading political parties like “Jan Morcha”, “Bajrang Dal” and others.
— Delhi News (@Delhi_News) August 29, 2016
No toll collection @ DND flyover today courtesy Jan hit morcha.Noida toll bridge company worried,some citing the lawlessness,some ecstatic
— Rashmi Mann (@RashmiMann) August 28, 2016
Some knowledgeable commentators even claimed that the DND flyover is a “scam” designed to unfairly profit the operator at the cost of the hapless public.
— हम भारत के लोग (@India_Policy) August 11, 2016
Litigation threatened business model
It was also known that a Public Interest Litigation (PIL) had been filed in 2012 by the Federation of NOIDA Residents Welfare Association in the Allahabad High Court claiming that as the Noida Toll Bridge Company had already recovered by way of toll many times the value of its costs in building the road, further recovery of toll is illegal.
Surely, discretion is better than valour?
Common sense demands that when one is faced with a risky situation, it is better to avoid it rather than to face it. After all, there is no dearth of stocks in India which offer top-quality and value at reasonable prices.
One is supposed to conduct a “risk-reward” analysis of every stock. If the risks outweigh the potential reward, one should avoid an investment and seek other pastures to graze on.
That's how a value trap looks like!
Analysis: Noida Toll Bridge Company Limited (DND Flyway) | Vijay Malik – https://t.co/Rm6uRBPy7B
— Dr Vijay Malik (@drvijaymalik) July 18, 2016
Yet PPFAS Mutual Fund increased its holding in Noida Toll Bridge
The baffling aspect is that PPFAS Mutual Fund not only turned a blind eye to the imminent dangers of Noida Toll Bridge but increased its holding in the Company.
As of September 2013, PPFAS MF held 81,43,185 shares of Noida Toll Bridge comprising a massive 4.37% of the equity. This holding was increased to 86,54,434 shares (4.65%) by September 2014. By September 2015, the holding swelled to 87,48,218 shares (4.70%). It stands at that figure as of September 2016.
The stock has always been a favourite of Parag Parikh, the late founder of PPFAS Mutual Fund. In an old interview, he called Noida Toll Bridge his “Number one investment idea“. Of course, when he made the recommendation, the dangers were not as clearly spelt out as they were later.
In just the last year, the Noida Toll Bridge stock has lost 40.6% of its value which means that PPFAS has lost nearly Rs. 10 crore of its AUM in the stock in the last year.
High Court bans toll collection by Noida Toll Bridge
On Wednesday, 26th October, the worst fears came true when the Allahabad High Court delivered a detailed judgement holding that the Company is not entitled to collect toll as it has already recovered much more than the cost incurred by it.
The Court pointed out that Noida Toll Bridge has recovered Rs. 810.18 crore from toll income since the commencement of the expressway till 31 March 2014. Approximately Rs. 300 crore more was realized through user fee or toll between 1 April 2014 and 30 September 2016, it added.
“Keeping in mind the public interest, as per the settled position of law that no private person or company can be allowed to earn profit from the public property at the cost of public at large for indefinite period and the Concept of Toll in India, the levy of User fee by the Concessionaire cannot be justified” the Court ruled.
“We direct that, henceforth, Noida Toll Bridge Company, the concessionaire shall not impose or recover any user fee or toll from commuters for using the DND,” the Court added in a grim tone.
Delhi-Noida Toll Bridge- Loot In The Name Of Public-Private Partnershipshttps://t.co/1WexCXG7Iu
— Prasanna Viswanathan (@prasannavishy) October 27, 2016
Noida Authority signed a Gold Plated contract with the Noida Toll Bridge company, assuring exorbitant profits till perpetuity.
— हम भारत के लोग (@India_Policy) October 26, 2016
Investors face brunt of poor stock selection by PPFAS
PPFAS announced yesterday that though the stock had triggered only one lower circuit of 20%, it was marking the price of the stock “down by two more market circuits i.e. 20% & 10%” from the closing price.
Being conservative, we have marked down the value of Noida Toll Bridge Company Ltd. in today's NAV. https://t.co/GiCIMIJ0NV
— PPFAS Mutual Fund (@PPFAS) October 27, 2016
Rajiv Thakkar, the fund manager, clarified that the additional write-down was because “Circuit down price is not the true price” implying that more downside to the stock price is expected.
— Rajeev Thakkar (@RajeevThakkar) October 27, 2016
But accolades flow in from investors …
The baffling aspect is that investors in PPFAS Mutual Fund and other knowledgeable investors, instead of being upset at the fact that the Fund continued to stay invested in Noida Toll Bridge despite the imminent dangers, applauded the fund manager for the write-down.
— jimitzaveri (@lucky_jimit) October 27, 2016
First in MF industry
PPFAS MF values NOIDA Toll Bridge 30% < market price
2.82% of portfolio
— Manoj Nagpal (@NagpalManoj) October 28, 2016
— ravi negi (@rnegi62) October 28, 2016
@PPFAS I agree. Unfortunate development beyond any fund manager's Control. Better to mark down now and hope SC reverses HC Judgement
— Hitesh Gajaria (@gajaria) October 27, 2016
Peculiar psychological trait of investors
This is a peculiar psychological behavior by investors that deserves to be probed. One can understand the sentiment that the fiasco is an “Unfortunate development beyond any fund manager’s control” if the dangers were not known or were unpredictable. Can one be so charitable even when the danger was clearly spelt out and the fund manager preferred to ignore it?
“Being conservative ….”
In the first tweet, PPFAS played on the words “Being conservative” we have marked down the value of Noida Toll Bridge Company”.
However, whether staying invested in Noida Toll Bridge despite the imminent dangers is a part of the “being conservative” culture requires to be considered.
Supreme Court dashes hopes by refusing stay
Till today afternoon, there was a ray of hope that the Supreme Court would bail out Noida Toll Bridge and stay the judgement of the Allahabad High Court.
However, these hopes were dashed as the Supreme Court has refused to interfere.
— ETMarkets (@ETMarkets) October 28, 2016
Noida Toll Bridge Company Limited should change name as Noida Free Bridge Limited.. ???
— Anand Mohan (@AnandMohan1977) October 28, 2016
SC's Diwali gift to Delhi-Noida commuters: SC refuses to stay Allahabad HC order making DND flyway toll-free
— Mihir Mishra (@mihirmishraET) October 28, 2016
Winding-up will result in value unlocking?
Fortunately, all may not be lost yet for the beleaguered investors in Noida Toll Bridge.
Some knowledgeable observers opined that if the Company is liquidated and its cash distributed amongst investors, hefty gains can be reaped by investors.
No toll for Noida Toll – Stock down at 16.30.
Net cash/ reserves distributed to each shareholder = Rs 28 (No guarantee if this will happen)
— Rajat Sharma (@SanaSecurities) October 28, 2016
However, the time frame within which this will be achieved, if at all, is anybody’s guess.
Inexplicable fascination of PPFAS Mutual Fund with foreign stocks despite pathetic returns
Another intriguing aspect is the fascination that PPFAS Mutual Fund has with foreign stocks. It has invested as much as 27.90% of the AUM in foreign stocks as of 30th September 2016.
|Stock||% of AUM||YoY Gain (%)|
|International Business Machines Corp||3.26||5.99|
|Anheuser Busch Inbev SA ADR||1.07||2.3|
|United Parcel Services||4.23||1.2%|
|Nestle SA ADR||2.90||(4.5)|
|Standard Chartered PLC||0.46||(25.04)|
As one can see, the gains from the foreign stocks are pathetic to say the least. The maximum gains are from Alphabet which has given a princely YoY return of 13.63%. Of the balance seven stocks, four are barely making ends meet while three are in the red.
It is notable that the investment in Apple was made despite the fund manager publicly expressing reservations as to the viability of Apple being able to charge a premium for its phones in the wake of rampant and aggressive competition from Android phones.
Even an index fund would have given better returns than the foreign stocks
One has to contrast the sorry selection of foreign stocks with the stocks picked by eminent stock wizards like Dolly Khanna, Vijay Kedia, Ashish Kacholia etc which have become mega multibaggers in the same time.
In fact, even an investment in an Index Fund would have given a superior return than the exalted foreign stocks referred to above. Even if one had even invested in average and run-of-the-mill Indian stocks, he would have more gains on the table than what the foreign stocks have to show.
There are two important lessons that one can learn from the fiasco. The first is that one should always err on the side of caution. It is foolhardy to play with fire if one wants to save oneself from burnt fingers. The second is that the fancy for foreign stocks is ill-founded. When enlightened foreign investors like Prem Watsa, Mark Mobius and others are making a beeline for India and pumping in billions of dollars into Indian stocks, it is foolish to be a contrarian and look for bargains overseas!