SLIC after fake diamonds

Friday, 24 June 2011 03:20 - - {{hitsCtrl.values.hits}}

Market uproar as state owned insurance giant buys 13% stake in Rs. 900 million loss saddled Blue Diamonds Jewellery exposing the buyer to allegation of being gullible victim of pump and dump scenario

Is Sri Lanka Insurance Corporation (SLIC) betting on fake diamonds was the immediate poser from some market analysts to the news of state owned giant investing in a 13% stake in loss making and not so fundamentally sound Blue Diamond Jewellery Worldwide Ltd.

In a filing Lanka Securities disclosed that its client SLIC General Fund has bought 13.12 million voting shares or 12.7% (voting stake) of Blue Diamond. When it was purchased or at what price wasn’t disclosed however.

At yesterday’s closing price of Rs. 9.30 the stake is valued at Rs. 122 million whilst at Blue’s peak of Rs. 9.80 it was worth Rs. 129 million. Blue voting shares closed up by 60 cents or 7%.

The net asset value of Blue Diamond which has Rs. 900 million in retained losses is only Rs. 2.11 though up from Rs. 1.47 a year earlier. Retained loss figure in 2009/10 financial year was Rs. 888 million. In 2010/11, the highest price of Blue was Rs. 4.60 whilst it finished the financial year at Rs. 3.

Widely considered as a “junk” stock Blue Diamonds along with a few others had been flagged off by concerned analysts as favourites for “pump and dump” manipulative trading. This allegation is difficult to prove but analysts opined that SEC if smart as it claims with new surveillance system installed, could detect any bad practices.

Other analysts said SLIC purchase could be on account of re-rating on Blue Diamonds following a welcome rebound in top line and cut in losses. In 2010/11 financial year Blue Diamonds had reduced its losses to Rs. 12 million from Rs. 20 million in the previous year. Turnover rose from Rs. 6.4 million to Rs. 55.87 million. The company which is said to be having the best infrastructure for diamond cutting and polishing business this week announced receipt of a mega new order from India though it didn’t disclose the value.

Nevertheless of late several stocks have been moved up and then dumped to gullible investors on the rise with former buyers exiting at hefty profit. In the case of Blue Diamonds, some analysts alleged that SLIC may have bought in such a sequence. Unless clarified or justified SLIC exposes itself to this allegation. Usually fund managers in state entities don’t disclose their investment rationale. To their credit though largely invested by previous administrations, SLIC posted the biggest ever pre-tax profit of Rs. 15 billion in 2010 on account of hefty capital gains.

Blue Diamonds yesterday saw 16.85 million voting shares changing hands via 1,456 trades generating a turnover of Rs. 158 million. Non voting saw 19.05 million shares changing hands before closing unchanged at Rs. 2.30. Last week 103.7 million shares changed hands via 7,609 trades for Rs. 867.6 million with price up by Rs. 3.10 or 46.97% to Rs. 9.70 whilst it hit an intra-week high of Rs. 10.20 as well. It was the third highest turnover generating stock last week.