Why Gitanjali Gems Going Down the Drain?

Gitanjali Gems IPO came into being somewhere in 2006 and we were abroad and had to go out our way to subscribe for the IPO as we saw a lot of potential in the stock. The stock did provide us with stupendous returns and we did exit at the right time with good profit in hand.

Greed has no limit and here the Mehul choksey who is the main promoter of Gitanjali Gems has gone to the extent of pledging his shares to raise money and thereafter use the same money for artificial price build up. We had rightly seen the fiasco which was being built up in the stock and had recommended selling in stocks dealing in gold. This sell call was also by virtue of govt imposing additional taxes on gold and we were proved right as Gitanjali Gems plummeted like a pack of cards.

Modus Operandi of Mehul Choksey – the key promoter

This man devised a strategy of pledging shares as collateral in lieu to fund his creeping acquisition. As per the latest shareholding pattern, over 1 Crore and 80 lakh shares are pledged. Macquarie Finance recently invoked the pledge shares and acquired 5.43% stake in Gitanjali Gems.With this pledged fund, he cunningly acquired over 1cr shares from the open market in the last three years. That resulted in Gitanjali's stock price rising from 120 odd in April 2010 to as high a figure of 638 bucks in April 2013.

Why such a steep fall in Gitanjali Gems?

We foresaw the forthcoming fall in gold prices and alerted one and all to sell the gold stocks as govt policy was also not in favour of jewellery stocks . All those who listened would have had been saved the mayhem.

Now can of woes of Gitanjali gems got compounded when triggering of margin calls and pledged shares added up with some HNI's stop losses has led to a steep erosion in the price of the stock.

Verdict

Gitanjali Gems has a good business model and can give a tough competition to Titan provided they improve their management and honour their commitment. We had a bad experience where we booked gold for Akshya Tritiya with a promise that we will get a refund if gold price is below our buying price. Now year 2013 saw the worst fall in gold and seeing the loss associated with the refund of money; Gitanjali Gems just undertook the volte-face and never refunded the difference between the booking price and the price prevalent on Akshaya Tritiya.