Why Is Granules India, The Potential “100-Bagger Stock” In A Free Fall? Is This The Opportunity We Are Waiting For?

First of all, we must compliment the wizards at Investco Management LLC for their masterful sense of timing. On 15th April 2015, when Granules was at Rs. 100, Investco dumped a massive chunk of 20,60,000 shares on the unsuspecting masses. Till 31st December 2014, they were the largest shareholder of Granules with a holding of 22,11,200 shares (pre-split) comprising 10.83% of the total equity. Their holding as of 31st March 2015 was 2,05,42,000 shares (post split).

Investco’s timing was perfect because since then, the stock has collapsed like a ton of bricks. At the CMP of Rs. 78, the stock is down a whopping 22% in less than two weeks.

Another major shareholder, Sparrow Asia Diversified Opportunities Fund, which held 2,19,000 shares (1.07%) as of 31st December 2014, is conspicuous by its absence in the 31st March 2015 list of major shareholders. Sparrow also appears to have sold off all/ a major portion of its shareholding in Granules.

The intriguing aspect about Granules is that almost all the leading brokerages are ebullient that it is a stock with great potential.

Apart from Motilal Oswal’s 19th Wealth Creation Study which boldly calls it a potential “100-bagger stock”, all others brokerages like KR Chosksey, Emkay, Anand Rathi, Centrum and Nirmal Bang are unanimous in their view that Granules is a mandatory stock to have in the portfolio. The logic is that Granules is “moving up the value chain”, has “strong revenue growth”, “increasing margins”, and that the valuations are “inexpensive and compelling”. (See my piece What Is Granules India & How Does It Qualify As A Potential 100-Bagger Stock? where I have collated all the brokerage reports). The Nirmal Bang initiating coverage report is available here.

What then has spooked big ticket savvy investors like Investco and Sparrow and the others to dump off large portions of the stock and run for cover? Why would anyone want to sell a stock that is supposedly on a fantastic growth trajectory?

One theory is that it was known that the Q4FY15 results would be poor. However, this does appear correct because the results are not that bad as to cause the intense selling. Also, long-term investors like Investco and others don’t sell only because of a bad quarter or two.

The other theory is that the proposed QIP issue and the consequent equity dilution have put off some investors. However, this again is not an acceptable reason for long-term investors to dump the stock.

The third theory is that it is just a bit of profit booking. Granules has been on a scorching upward trajectory (despite the steep fall, the stock is still up 147% on a YOY basis) and a bit of profit-booking is to be expected.

Now, the difficult aspect is about what we should do. If we dive in and some skeletons come tumbling out from Granules’ closet, we could get badly singed. On the other hand, if this is just harmless correction, then we could be missing out on a great opportunity to tuck into a potential winner.

I think the best course of action is to start a SIP and keep a red alert for brokerage updates on the Q4FY15 results. This way, we have our finger in the pie and a toe at the door. We can decide to increase the allocation to the stock once the all-clear signal is given.