6 Popular Stocks That Turned Into Penny Stocks

Investing in stocks by its very nature is a bumpy ride. Stocks never go up in a straight line. 

But if the stock is of good quality, it will eventually recover and also end up giving good returns over the long term.

However, if it's not, you may as well be stuck in a value trap. 

Investing in fundamentally weak stocks and the ones that have corporate governance issues, doubtful related-party transactions, or heavy debt, can cause unparalleled damage.

In today's article, we look at popular stocks that crashed big time and turned into penny stocks, i.e. which went from ‘Multibaggers to Multibeggers'.

#1 Unitech

Talking about wealth destroying stocks, ones belonging to the real estate sector feature on the top of our minds.

And one of them is the market darling of 2007 - Unitech.

Unitech was India's largest listed real estate company in 2007. During the 2003-08 real estate boom, Unitech was one of its poster boys. Its promoters - the Chandras were the second wealthiest developers in India after Kushal Pal Singh of DLF.

In the mid-2000s, as the real estate sector was at its peak, many developers expanded their operation to other parts of the country. Unitech was one of them.

In 2007-2008, Unitech Wireless, a subsidiary of Unitech, applied and won the 2G telecom license by paying the government Rs 16.6 bn under the infamous first-come, first-serve policy. Later that year, Unitech sold 67.25% of Unitech Wireless to Telenor of Norway for Rs 6,120 crore. 

As the stake sale happened when the company had no other asset on its books, it was assumed that this was the value of the license it held. Then the scam went bust. 

A CAG report blew the lid off, saying the sale of inexpensive spectrum caused the government a loss of up to Rs 1.76 lakh crore, while benefiting private corporations like Unitech.

Then came the financial crisis of 2008 following the collapse of Lehman Brothers. The red hot Indian real estate market went bust.

By 2009, Unitech had bought 14,000 acres of land across India and to bankroll these purchases, it had planned to raise $1.5 billion by listing some assets in a real estate investment trust (REIT) in Singapore and another $1 billion from investors. 

But before the company could raise funds, financial markets fell and all of Unitech's plans to raise funds got shelved. It ended up with debt of over Rs 8,000 crore.

Shares of Unitech went on a free fall. Its market cap fell from Rs 87,300 crore to Rs 3,750 crore in just a matter of 10 months. That's a wealth erosion of 96%!

Unitech's current market cap stands at Rs 600 crore.

#2 Vodafone Idea

Telecom companies are straddled with high debt, intense competition, and lack of pricing power. 

High spectrum costs and regulatory issues have hampered the sector. And Vodafone Idea has suffered the most from it.

Troubles for Vodafone Idea started with a retrospective tax when Vodafone PLC purchased a 67% share in Hutchison Essar for $11.1 billion and the Indian tax department asked the operator to pay Rs 20,000 crore as penalty.

Vodafone Idea was once a giant that ruled the telecom industry but went extinct when a new baby was born in this country.

India's richest man Mukesh Ambani's telecom baby, Reliance Jio, was born in September 2016.

With the launch of Jio, India's telecom story was re-written. Big operators - Bharti Airtel, Vodafone India, and Idea Cellular were caught by surprise.

At that time, Vodafone used to get close to 90% of revenues from calling. Reliance Jio's free voice calling made matters worse. Later on, Jio announced its cheap tariff plans. 

Apart from bringing cheap data plans, Jio launched the Jio Phone and the Jio Phone 2 at very affordable prices, whereas Vodafone had no such option.

Even after merging with Idea in 2018, the telco has not been able to recover. 

Then came the Supreme Court's AGR verdict in favor of the government in 2019 which asked the already beleaguered company to pay or to clear all dues related to average gross revenue. This year though, the court allowed operators to make payments in 10 years.

In April 2015, Vodafone Idea had a market cap of Rs 72,920 crore, which fell to a low of Rs 8,480 crore in November 2019.

#3 Suzlon Energy

This article might have reopened some old wounds for those people who bought Suzlon at its peak in 2008.

In 2008, Suzlon Energy share price was at its peak at Rs 459. But today, it's a penny stock with a price as low as Rs 7.

Till 2007-08, Suzlon was a healthy company. It posted a consolidated net profit of Rs 1,020 crore in fiscal 2008 on a turnover of Rs 13,680 crore.

As Suzlon's Indian business was doing well, it made big-ticket global acquisitions. In 2006, it acquired Belgian wind turbine gearbox manufacturing firm, Hansen Transmissions International NV. 

In 2007, it bought a majority stake in the German wind turbine maker REPower. Between 2007 and 2011, Suzlon progressively ramped up its stake in Senvion and eventually bought out the whole company. 

But little did we know that the company's promoters started to ignore Indian markets in order to acquire global ones.

Then came the downfall in 2008, when Lehman Brothers collapsed. Order flow from two of the biggest energy markets of the world Europe and the US stopped completely. Losses and debt both started to rise.

In the five years between fiscal 2010 and fiscal 2015, Suzlon's losses widened nearly ten times to Rs 9,160 crore.

From having a market cap of Rs 68,070 crore in January 2008, Suzlon's market cap stood at Rs 5,530 crore in December 2008 … a wealth destruction of over 90% in a span of 11 months. 

#4 BHEL

Wondering how a good stock like BHEL ended on this list?

BHEL was a very popular stock in the 2003-2008 bull run. It delivered 10x gains during this phase.

But the aftermath of 2008 financial crisis left a hole to fill for country's largest power equipment maker. After 2008, BHEL was hit by a string of order cancellations and earnings downgrade.

Back then, new orders were difficult to come because high interest rates affected the investment cycle.

In terms of wealth destruction, BHEL's market cap peaked at Rs 1,40,680 crore back in November 2007. Its current market cap is Rs 21,850 crore.

#5 Reliance Communication

Before Reliance Jio came into play, Reliance Communications (RCom) disrupted the telecom sector.

When other operators charged anywhere between Rs 4-6 per minute even for incoming calls, RCom offered them for free with a Rs 500 handset.

RCom even hired former Indian cricketer Virender Sehwag with a catchy ‘Karlo duniya mutthi mein' jingle.

However, the company's choice of technology in CDMA early on, made it invest capital into expanding into 3G and GSM services. That's when the troubles started. 

RCom discovered CDMA services generated less revenue than GSM. So it invested heavily to roll out GSM services and eventually ended up with massive debt.

Anil Ambani grabbed users through an aggressive pricing strategy which was 60% cheaper than rivals.

But over the years, debt ballooned and RCom was unable to reduce the debt due to failed business sales and falling revenues.

Reliance Jio's entry was another trigger which lead to RCom drawing down curtains on 2G and 3G services.

In 2012, RCom lost the second position to Vodafone, moved further down to the fourth spot in 2016, and ultimately lost its grip on the market.

RCom tried to find solutions, one of which was a proposed merger with Aircel, but the deal fell through.

RCom's market cap peaked at Rs 1,69,320 crore when its share touched a high of Rs 821 in January 2008. In the next 13 months, the share price fell to around Rs 150 and the market cap touched a low of Rs 27,300 crore.

The wealth destruction did not stop there. Matters went from bad to worse. Till date, the company has not recovered. RCom's current market cap stands at a mere Rs 800 crore.

#6 Vakrangee

Back in January 2018, a little-known stock was grabbing all the headlines. It was in the news for having crossed Rs 50,000 crore in market cap.

The tiny software company's market cap was higher than companies with almost 4 to 5 times its sales and profits.

It has surpassed the market cap of the pharma heavyweight Lupin (market cap of around Rs 42,400 crore) – a much bigger company with sales and net profits more than 4 times that of Vakrangee.

Investors in Vakrangee were rubbing their hands in glee. After all, the stock had turned into a 10 bagger in just two years.

Back then, Vakrangee was the largest enrollment agency for UIDAI and carried out over 50 million Aadhaar enrolments.

It came under the lens of markets regulator for alleged price and volume manipulation of its own scrip at Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Reportedly, a group of 22 clients related to each other as well as to the company were continuously buying and selling the scrip, accounting for 74.87% of market gross on certain days.

Following this news, shares of the company went on a free fall and fell even more after a few months.

In May that year, Price Waterhouse & Co., its auditor, resigned abruptly, stating that while it repeatedly sought information on matters related to ‘election books, bullion and jewellery businesses' of the company, it failed to get any relevant information.

From having a market cap of Rs 53,500 crore, Vakrangee eroded investors' wealth amounting to more than Rs 50,000 crore within a matter of months.

The takeaway

So these were among the many stocks that fooled investors. Most of them were once big, well-known companies. 

When these stocks started to fall and touch new lows, investors got interested, hoping they will make a comeback. On the contrary, they fell even more, destroying more wealth.

These kinds of stocks are often categorised as value traps … they appear to offer value, but in reality, they are traps. 

They have certain red flags such as loan defaults, rating downgrades, selling of pledged shares, rising debt, and poor earnings.

You must learn to differentiate opportunities from traps and to do so, the first thing you should keep in mind is that beaten down stocks do not justify buying that stock. A consistent fall can actually be a sign of something grim.

As it's said, investing is simple but not easy. Stock selection is tricky but with the right fundamental analysis and margin of safety, one can make it big.

(This article is syndicated from Equitymaster.com)

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)