I passed an exam with top marks even though I didn’t study anything on the subject.
It just sounds stupid, right? Because there’s no way I’m going to be at the top of the class without studying.
Likewise, if I told you that a huge loss-making company could give you high returns, you wouldn’t believe me…
Now, what if I told you that my best friend sat in front of me on that exam, and she was indeed a genius?
Similarly, a loss-making company offers high returns because the company is a branch of a highly profitable conglomerate and is slowly changing things.
Now that’s believable, right?
In the example above, I’m talking about Tata Teleservices. The stock has indeed made headlines by generating huge returns despite reported losses.
Over the past year, the Tata Teleservices share price has soared 263%.
Over the past week, its stock price has risen 31%.
Take a look at the table below.
But why is the Tata Teleservices share price rising despite the losses? Does the market know something retail investors don’t?
Keep reading 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 together, creating many advantages.
When the collaboration was announced, Chairman of Tata Sons – N Chandrasekaran said:
“We see great potential in collaborating with Renesas in areas such as automotive electronics and current and future telecommunications networks. The collaboration will accelerate our presence in these areas in India as well as globally”
This news has revived speculation about Tata Group’s ambitious plans in the telecoms sector.
The Tata Group is expected to reap some benefits from the development of the 5G sector in India, as it plans to enter telecom equipment through Tata Teleservices.
Therefore, investors are optimistic that the switch from 4G to 5G will benefit Tata Teleservices.
#2 Improve finances
Tata Teleservices is experiencing knee-deep losses. However, losses have recently decreased.
For the financial year 2022, Tata Teleservices recorded a loss of 12,150 million rupees, 39% less than the loss of 19,967 million rupees last year.
The company’s operating profits have also increased significantly over the past four years.
#3 Purchase FII
Another reason could be that FIIs buy 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 was 0.01% in the quarter ending September 2021.
Their stake increased to 2.4% at the end of June 2022.
#4 Family support
No matter how bad a child is, a family never abandons him. The same thing happened with Tata Teleservices. Faced with illiquidity, she got a letter of support from Tata Sons. Tata Sons has injected a lot of funds.
A recovery strategy is being implemented for Tata Teleservices. He is relaunched in a new avatar called Tata Tele Business Services (TTBS).
Therefore, the support of the Tata Group has boosted Tata Teleservices’ short-term growth prospects.
Reduced losses and bright growth prospects are positive signs for Tata Teleservices.
It looks like Tata Teleservices is slowly recovering its business. Therefore, the market believes that the business will be profitable in the future.
Tata Group is known for never disappointing its shareholders. Therefore, when a company operates under the Tata brand, investors expect the company to do extremely well in the future, just like TCS and Tata Elxsi.
Therefore, it looks like investors are jumping at the chance 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 company. Investing in a loss-making company goes against value investing.
The losses have diminished, but they remain enormous. Out of the last 83 quarters, Tata Teleservices has only reported a net profit in the last two quarters!
Therefore, an investor should carefully perform a risk-reward analysis before making any decision regarding Tata Teleservices.
Disclaimer: This article is for information only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)