I passed an exam with the highest marks even though I didn’t study anything about the subject.
That just sounds stupid, right? Because there’s no way I can top the class without studying.
Similarly, if I told you that a huge loss-making company could give you high returns, you won’t believe me…
Now, what if I told you that my best friend sat in front of me in that exam, and she was indeed a genius?
Similarly, a loss-making company is delivering high returns because the company is an arm of a highly profitable conglomerate, and it’s turning things around slowly.
Now that is believable, right?
In the example above, I’m talking about Tata Teleservices. The stock has indeed made many headlines by delivering huge returns despite reporting losses.
In the last one year, Tata Teleservices share price has zoomed 263 per cent.
In the past one week, its share price rose by a whopping 31 per cent.
Take a look at the chart below.
But why is Tata Teleservices share price rising despite losses? Does the market know something which retail investors don’t?
Read on to find out…
#1 The 5G Effect
In June 2022, Tata Teleservices entered into a contract with a Japanese chipmaker Renesas Electronics Corp.
The contract will bring two leading companies closer, creating numerous benefits.
When the collaboration was announced, the chairman of Tata Sons – N Chandrasekaran said,
“We see great potential in collaborating with Renesas in areas like automotive electronics and present and future telecom networks. The collaboration will accelerate our presence in these areas in India as well as globally”
This news boosted the speculations about Tata Group’s ambitious plans in the telecom sector.
It is expected that Tata Group will derive some benefits from the 5G sector development in India since it is planning on entering the telecom equipment through Tata Teleservices.
Hence, investors are optimistic that the change from 4G to 5G will benefit Tata Teleservices.
#2 Improving Financials
Tata Teleservices is running in knee-deep losses. However, the losses have reduced recently.
For the financial year 2022, Tata Teleservices reported a loss of Rs 12,150 m which is 39 per cent lower compared to last year’s loss of Rs 19,967 million.
The company’s operating profits have also increased significantly over the past four years.
#3 FII Buying
Another reason could be FIIs buying stakes in Tata Teleservices.
It is believed that when FIIs invest in a company something good is about to happen for the company.
FIIs have been investing their stake in Tata Teleservices since September 2021. FII’s stake stood at 0.01% in the quarter ending September 2021.
Their stake has increased to 2.4 per cent by the end of June 2022.
#4 Family Support
No matter how bad a child is, a family never gives up on the kid. The same happened with Tata Teleservices. When it faced illiquidity, it obtained a letter of support from Tata Sons. Tata Sons infused a lot of funds.
A turnaround strategy is under implementation for Tata Teleservices. It’s being revived in a new avatar called Tata Tele Business Services (TTBS).
Hence, the support of the Tata group has boosted near term growth prospects of Tata Teleservices.
Reducing losses and bright growth prospects are positive signs for Tata Teleservices.
It seems Tata Teleservices is turning around its business slowly. Hence, the market believes that the company will be profitable in the future.
Tata Group is known for never disappointing shareholders. Hence, when a company is running under the Tata brand name, investors expect that the company will do tremendously well in the future just like TCS and Tata Elxsi.
Hence, it seems like investors are jumping at the opportunity to buy a Tata group penny stock.
However, value investors would do well and stay away from the company as it is still a loss making enterprise. Investing in a loss-making company is against value investing.
The losses have reduced, but they are still huge. Out of the last 83 quarters, Tata Teleservices has reported net profit only in the last two quarters!
Hence an investor should carefully perform a risk-reward analysis before making any decisions about Tata Teleservices.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)