Investors Will Continue To Hammer Stocks With Poor Governance

Investors are getting increasingly cautious and sensitive to companies, where there are poor governance issues.

Companies with an impeccable track record, would continue to be traded at very expensive multiples. HDFC Bank, Hindustan Unilever etc., where there have been no governance issues would continue to trade at very solid multiples.

Not only governance issues

It could not only be governance issues, but, also groups where there is a high leverage. Take the case of Zee Entertainment, the company has a great business, which is a leader in its line of activity, but, the stock has been hammered down by high group debt. Here the problems stem from high leverage by the group and not about governance issues. The stock has halved in value since debt repayment issues by the group.

Bluechip company Infosys has had governance issues in the past and was in the limelight once again after whistleblower allegations.

The company has now appointed a law firm and hopes to resolve issues. The problem for Infosys is the distraction. If the top management continues to get constantly distracted by issues that related to corporate governance, it could result in sub-optimal performance at the company, The stock which was traded near the Rs 850 levels, was last seen trading below Rs 640. There is likely to continue to be pressure on the stock.

IndiaBulls Housing is another company that has been constantly the target of a smear campaign. So far there has been nothing proven against the company, but, the damage seems to have been done to the stock price. From levels of Rs 919, the stock has plunged to levels of Rs 186. The company has continued to insist that it remains extremely liquid and has promised an early redemption of its NCDs. Cash and liquid instruments at the company now total in excess of Rs 18,000 crores.

In the past we have seen auditors resigning like in the case of Manpasand Beverages, where considerable damage was done to the stock. Some of these stocks, especially the smaller players have never recovered from the carnage.

Investors are increasingly unforgiving where there are governance, debt or auditors related issues. Some of the large companies, they may recover if nothing serious is proven, but, for the smaller ones, the stock may never even recover.

Investors are advised to stay away from such companies, especially the smaller ones. Look for companies where there are no governance issues, a solid management and a good track record.

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