Multibagger: Penny stock Panyam Cements skyrocketed almost 3000% in a year; should you buy?

Once a penny stock, Panyam Cements and Mineral Industries has transformed into a multibagger success story, delivering phenomenal returns to its investors recently. Over the past year, the stock has performed remarkably, soaring by 2986 percent and maintaining investor confidence amid market fluctuations. From its 52-week low of ₹11.32 on October 4, 2023, the stock has skyrocketed by an astounding 1058 percent to its current price of ₹233. Earlier this month, on July 10, it reached a 52-week high of ₹263.25, and it is currently about 11.5 percent below this peak.

In 2024 alone, Panyam's stock price has surged by an astounding 185 percent, skyrocketing from ₹81.8 in December 2023. The stock experienced gains in five out of the seven months. In July, it saw an almost 4 percent gain following a 34 percent rally in June. However, it dropped around 22 percent in May after a 47.5 percent surge in April. March saw a decline of over 19 percent, but the first two months of the year were positive, with the stock jumping 45 percent in February and 51 percent in January.

Over the past five years, the stock has seen impressive gains, climbing by over 2741 percent from ₹8.2 in July 2019.

Despite its exceptional performance, it's essential to highlight that the stock is currently under ESM: Stage 2.

What is ESM?

The Enhanced Surveillance Measure (ESM) is a regulatory framework implemented by the National Stock Exchange (NSE) in India. It aims to enhance monitoring and surveillance of listed companies to ensure investor protection and market integrity.

Under Stage I, the trading of the securities is settled through a trade-for-trade mechanism with a price band of 5 percent, or 2 percent.

Under Stage II, the surveillance action permits trading on all trading days under periodic call auctions with trade-for-trade settlement and a 2 percent price band. Earlier this stage permitted trading just once a week.

About the Firm

Panyam Cements and Mineral Industries Limited manufactures and sells cement and cementitious articles in India. The company offers OPC 53 grade, OPC 43 grade, PPC, and PSC cement. Its products are used in irrigation and power projects, as well as in the construction of multi-storied buildings, concrete roads, and various housing colonies and townships. The company was incorporated in 1955 and is based in Hyderabad, India.

Earnings

In the March quarter (Q4FY24), Panyam Cements reported a net loss of ₹1,549 lakh, a decrease from a loss of ₹3,234.76 lakh in the same period last year.

Additionally, the total revenue for the quarter reached ₹4,414.85 lakh, a dramatic surge from ₹287.88 lakh a year earlier but a fall from ₹5,116.67 lakh in the previous December quarter.

Meanwhile, for the financial year 2023-24 (FY24), the company's net loss declined to ₹5,501.63 lakh versus a net loss of ₹5,985 lakh in FY23. Revenue for FY24 came in at ₹13,453 lakh, a multifold increase from ₹3,910 lakh in FY23.

Brokerage Views

Domestic brokerage house ICICI Direct highlighted several positive aspects of Panyam Cement's financial performance. As per the brokerage, the company has shown a rising net cash flow and cash from operating activities, indicating strong financial health. Additionally, there is notable growth in quarterly net profit, coupled with an increasing profit margin year-over-year. Another significant factor is that Panyam Cement operates with zero promoter pledge, which enhances its credibility and stability in the market, it added.

Meanwhile, its weaknesses, as per the brokerage, are -

- Inefficient use of capital to generate profits - RoCE declining in the last 2 years

- Poor cash generated from core business - Declining Cash Flow from Operations for last 2 years

- Declining profits every quarter for the past 2 quarters

Investing in penny stocks can be enticing due to their potential for high returns at relatively low entry costs, but they come with substantial risks. One major challenge is liquidity, as penny stocks typically have lower trading volumes compared to larger, established companies. This lack of liquidity can result in exaggerated price swings, making these investments highly volatile. Additionally, penny stocks often operate under less stringent financial reporting standards and regulatory oversight, increasing the risk of market manipulation and fraud. These factors contribute to the overall heightened risk of trading in penny stocks.

To navigate this volatile landscape wisely, investors should conduct thorough research and employ strong risk management strategies. Essential steps include understanding the company’s fundamentals, evaluating its market position, and scrutinising its financial health. Maintaining a disciplined investment approach and setting realistic expectations can also help mitigate potential losses. By exercising diligence and caution, investors can better manage the uncertainties of penny stocks, increasing their chances of capitalising on opportunities while protecting their investments from undue risks.

Disclaimer: This story is for educational purposes only. Please speak to an investment advisor before making any investment decisions.