Corporate governance issues: No respite for Vakrangee; stock down by half

While PC Jeweller, the company in which Vakrangee had purchased 0.5% has recovered, the latter continues to be under selling pressure

The Vakrangee stock has shed 53 per cent over the past 10 days, including 10 per cent in trade today on corporate governance issues. The company was reportedly being investigated by the Securities and Exchange Board of India (Sebi) for price and volume manipulation in the first half of 2017. The company has, however, indicated that the news is baseless and factually incorrect and they had not received any official communications from the regulator or the exchanges.

PC Jeweller also has slipped in a similar way before recovering and is now down 26 per cent over the past week on the back of its links with Vakrangee. Vakrangee had invested Rs 1.12 billion out of its total treasury fund of about Rs 15 billion in PC Jeweller on January 25.

In addition to the investigation, the Street was also spooked by an abrupt change in treasury investment policies by Vakrangee. Prior to the latest change, 70 per cent of its treasury fund was deposited in fixed-income instruments while the rest was put in mutual funds and direct equity investments. The company, however, announced a new treasury policy on January 30 stating that 90 per cent of the treasury funds would be invested in bank fixed deposits and debt mutual funds, while the rest would be invested in equity mutual funds. The company has indicated that no funds will be invested in direct equity and private placement funds.

Analysts believe corporate governance issues at Vakrangee have cropped up again after a long gap and would impact its valuations, though on first reading there is no impact on financials. B&K Research, which has downgraded Vakrangee to underperformer, while being positive about financial outlook and rural opportunity, says its initial thesis about improving corporate governance is no longer valid and that is why the stock has been downgrade.

Other market experts say the business model of Vakrangee, which acts as an access point for rural customers for online services, could come under threat as telecom and IT penetration increases, making the access points redundant. It prefers companies higher up in the software services and product value chain rather than in the integration space.

Both Vakrangee and jewellery retailer PC Jeweller reported a 40-80 per cent growth in revenues, 50-80 per cent growth in net profits in the December quarter. While the financial performance has been strong, given the sharp volatility and issues of corporate governance, investors should avoid these scrips.