The year 2021 has put many stocks in the limelight. Some say it was the bull run that overvalued the stocks while some believe that the prosperous economic growth contributed to this meteoric rise in stock prices.
One of these multi-baggers has been Tata Teleservices giving phenomenal returns during its rise. Before the pandemic, the stock traded in double digits amongst other penny stocks. But Q3 of FY 21-22 saw the accelerated rise of the stock touching record levels of Rs.290 from Rs.35 points.
What does Tata Teleservice do?
Tata teleservices is a subsidiary of Tata group and is involved in the mobile network services, internet, broadband services enterprises spanning connectivity, collaboration, cloud, SaaS, security, IoT, and marketing solutions spanning over B2B and B2C segments.
What was the reason behind the meteoric rise of Tata Teleservice?
Tata teleservices has been incurring losses for the last 12 years with 2021 being the only exception. In 2021 with the emergence of Covid-19 most of the work was based on the work from home model. The dependency on internet services and cloud-based working.
This gave birth to the opinions of the investors to create their growth prospects rather than valuing the company based on its core fundamentals. This was wildly supported by the bullish rally of stock continuing to hit upper circuits in almost every trading session!!
If we consider the performance of the stock during 2021, we see that the stock has seen an astounding increase of over 3000%.
Valuation concerns that the stock brings with it?
The market capitalization of Tata telecommunication reached the heights of Rs.58000 Cr. This Mcap is similar to the already established names from Tata like Tata Communication. The company has seen a continuous fall in revenue, reserve and also has a high debt to equity ratio. This raises some serious questions on the valuations of the stock.
Is the share expected to continue falling?
After reaching the heights of Rs.290 per share. Tata teleservices has been continuously hitting lower circuits giving no opportunity for retail investors to exit their position.
On 11th January 2022, the company opted for conversion of their interest amount on adjusted gross revenue (AGR) dues into equity. This would mean that the government will hold approximately 9.5% of the total outstanding shares of TTML.
But what shocked investors, even more, were the calculations provided by the Department of Telecommunications during the conversion. According to the DoT the average price of the company’s shares, as per the calculation method provided in the department of telecommunications was only Rs 41.50 per share.
This news intensified the selling pressure and led to a further fall in the stock price. Currently, the stock has fallen more than 55% from its all-time high of Rs.290.15. It is further expected to continue falling until it reaches the valuations provided by the department of telecommunications.
This shows how ignoring the fundamentals and looking at the positive trend or buying on the basis of a bullish trend sometimes can backfire. This case study provides an insight into the selection of the stock and the significance of the valuations. Not all penny stocks will have high valuations in the future so it is crucial to understand the core fundamentals before investing in any stock.
