In today’s Finshots, we look at how Elcid Investments became India’s priciest stock and if it’s really worth it.

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The Story

A few days ago, something extraordinary happened. The stock price of Elcid Investments, an NBFC (Non-Banking Finance Company) listed on the BSE, skyrocketed by nearly 67,00,000%! From ₹3.53 to ₹2,36,250.

This has now made it the priciest stock in the Indian market, surpassing even MRF i.e. a single share of Elcid investments is priced at a figure higher than any other share in the public market.

But how did a low-priced penny stock get here, you ask?

Well, it wasn’t magic. It was actually thanks to market regulator SEBI’s (Securities and Exchange Board of India’s) new “special call auction” mechanism. And if you’re wondering what that is, let’s give you a quick primer.

A few months ago, SEBI noticed something odd. Many Investment Companies (ICs) and Investment Holding Companies (IHCs) weren’t trading at prices they probably deserved. For the uninitiated, investment companies mainly invest in stocks, mutual funds and debentures, while IHCs hold stakes in other companies. These companies don’t have operations of their own or produce anything themselves. Their main job instead is just to manage their investments and make money through dividends and returns.

And because they don’t have any real business activity, they don’t usually attract a ton of investor interest. The end result is that their stocks often trade way below their book value (total worth of their assets after deducting liabilities).

So, to improve liquidity, help investors discover fair prices and generally drum up more interest in these stocks, SEBI introduced something called a special call auction. This system helps boost trading for stocks that don’t see much action while keeping prices steady. In a call auction, the stock exchange sets a special trading window on a specific day. During this time, investors can place buy or sell orders without any price limits, meaning there’s no upper or lower circuit, so prices can move as high or as low as investors are willing to pay.

Think of it as a controlled trading environment where investors can discover new price levels and have the option to cash out if they want. This helps improve liquidity, so investors might feel more confident trading these stocks on regular days too.

But not all IC and IHC stocks qualify for this auction.¹ There are some strings attached. To be eligible, the company must have been listed on an exchange for at least a year and not be suspended for trading. They also need to have at least 50% of their assets invested in other listed companies. Plus, the stock’s Volume Weighted Average Price (VWAP), which is basically the average price of a stock based on how much it was traded over a set period, in this case, six months — needs to be less than 50% of its book value per share.

And Elcid Investments ticked all the boxes. Being an IC with 93% of its assets in stocks of other listed companies and a stock price that was a mind-boggling 1,65,00,000% below its book value per share, it qualified for SEBI’s special call auction.² And the rest, as they say, is history. Almost overnight, the stock became a multibagger. To put that in perspective, if you had invested ₹1 lakh in Elcid Investments, it would now be worth around ₹670 crores, or even more, considering the stock’s recent price rise! Crazy, right?

But hold on… does this really mean that Elcid Investments’ stock is actually worth this price?

Well, you see, there are many ways in which you can value an IC like Elcid. One common method is the book value method. Basically, you calculate the value of the company’s net assets and then divide that by the total number of shares available in the market. If you do that for Elcid Investments, you’d find that its stock is actually valued at ₹5.8 lakhs per share. This means that, at its current price, the stock is still undervalued by about 125%, which suggests there might be even more room for the stock to grow.

But before you get all excited and rush to bet your money on the stock, here’s the thing.

See, investment companies like Elcid have really low liquidity, which means that there aren’t many buyers or sellers out there. In fact, there are only 328 public shareholders who own Elcid Investments. As an Economic Times article put it ― “It’s an exclusive club”. And the liquidity might not get any better. Why’s that?

To understand this, we’ll have to go back and look at other ways in which companies like Elcid Investments are valued.³ Like say, the dividend discount model, which calculates a stock’s current value based on future dividends. Now, Elcid has paid dividends between ₹10 and ₹25 over the last two decades, which might sound great since that’s over 100% of its erstwhile share price.⁴

But when you dig deeper, it’s not that attractive. Elcid earns around ₹110 crores from investments in companies like Asian Paints and Paytm.⁵ And if that profit were shared with all shareholders, it would be about ₹5,500 per share. Instead, it last paid out a measly ₹25 as dividend. This means that the company keeps most of its earnings to itself, which discourages new investors and keeps its value from rising to where it should be.

But there’s another way to unlock the value of a stock like Elcid Investments. And that is to have shareholders push the promoters to sell some assets or shares in profitable companies like say, Asian Paints. This would allow profits to be shared among shareholders and increase the stock’s value.

However, that isn’t a possibility here either because in most ICs and IHCs, promoters usually own about 75% of the shares, leaving retail investors like you and me with little influence. Without that, it’s tough for Elcid’s stock price to reflect its true value, which discourages more retail investors from buying in. And if it stays that way, the liquidity will never improve.

Also, since it’s so undervalued, why would someone sell it to you for such a low price when they know it’s worth way more? So, finding someone willing to sell is nearly impossible.

But let’s say that you somehow get a chance and manage to buy it; selling it later could be a hassle. Like we’ve told you all along, the special call auction might not improve liquidity much, which means you might be stuck holding the stock until the company either winds down or gets delisted at a price the promoters set. And by the way, delisting isn’t easy for Elcid either. They’ve tried and failed before because shareholders won’t sell for less than the actual book value, which is too pricey for the promoters.⁶ So, a successful delisting is unlikely.

So yeah, it’s pretty much a vicious cycle. And the only ones making money from a stock like Elcid Investments are that small group of investors who got in years ago.⁷

And if you’re one of those people, well done. If not, well, we can all watch the action from the sidelines.

Until next time…

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Story Sources: The Hindu Businessline [1], Elcid Investments’ Annual Report [2] [5], Capitalmind [3], Moneycontrol [4], The Economic Times [6] [7]

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