The arrest of the education company Everonn Managing Director on charges of corruption, has taken down the shares of the company by 42% in three days. Investors have lost almost half the value of their holdings in Everonn on the back of the arrest. The Managing Director who is also the co founder of the company was arrested on charges of bribery and tax evasion. Everonn is in the business of providing education through a web technology platform. As usual till August 2011, leading institutional brokers had rated the stock as an outperformer even though the promoters had diluted equity from 73% to 57% in the last one year. The promoters had also pledged 61% of their total holding to raise funds. The company had thirteen subsidiaries. The pledging of shares, dilution of equity, thirteen subsidiaries and a business model that has not stood the test of time should have raised eyebrows amongst investors. Unfortunately an arrest brought the castle in the air down. Investors will never recover their money in the company as with other education companies seen in the past and investors are better off selling out of Everonn and other such companies in their portfolio.
Education is a stock market favourite in bits and spurts. The last education boom was in the late 1990’s when the software outsourcing boom was on. Software education companies sprung up by the dozen with some of them becoming high flyers in the market. One such company was Software Solutions, which was into Oracle education. It was a darling with the investor community and in the initial days the stock was a multibagger many times over. The promoters of the company were only too happy meeting analysts and fund managers as their wealth grew with every meeting. Unfortunately the promoters became more interested in the stock price of the company rather than running the company itself. I met the CFO of the company in my analyst days and his eyes were glued to the stock price throughout the meeting. It was enough of an awakening call to tell investors to avoid the stock even if it was flying high at that time. The stock price crashed and investors lost all their money and the company is no longer in existence.
There are companies that have survived thorough time. NIIT is one such stock that has been in existence for a long period of time but its stock price is still below peaks seen in late 1990’s. The fact that stock price of long standing companies of repute is still struggling to perform should have raised eyebrows amongst investors in education stocks.
The other high flyer of the decade Educomp Solutions , which is also in the web based education business saw its stock price fall from spectacular highs is also an eye opener. The stock was a multibagger in the 2006 to 2008 period and after peaks of 2008 it has lost almost 80% of its value. There were tax raids on the company and questions were being asked on the nature of financials. Needless to say before the fall in prices most of the institutional brokerage houses were bullish on the stock.
Investors in education stocks that have crashed should not hope for the best. They should cash out with whatever they have left and look elsewhere to make the returns. The promoters will be first to bail out and investors will be left holding the baby.