Orchid Pharma: The Script Hitting Upper Circuit!

History repeats itself! And the share markets are the perfect place if you want to test the credibility of this statement. Having said that right now seems to be an ideal time. Why? 

The story which kept the entire market confused a year back is now taking another form. While the guessing has already begun, a lot of investors are getting into it without knowing the actual story. Wondering which stock it is? It is Orchid Pharma's share prices which is defying all the odds in the last few months. 

Jump in to know the details of the situation!

Orchid Pharma – A brief history 

Orchid pharma is a company whose main line of business is concerned with pharmaceuticals. It is based in Chennai and was once the youngest yet growing organisation in the sector. It was founded by an IIM A alumni Kailasam Raghavendra Rao. 

In the year 2017, the company which was on the radar of growth saw a huge setback. The company stood second in the list of debt-burdened enterprises put forth by the RBI. Orchid Pharma had defaulted the payment of loans worth 3,200 crores to a consortium consisting of 24 banks. The company, which was in a dire situation, was then dragged to the NCLT by its lenders. Following a series of proceedings, the company's future witnessed a glim light of hope.

Orchid Pharma - defying the odds

Orchid Pharma was taken over by Dhanuka Laboratories after the proceedings of NCLT. Furthermore, Dhanuka Laboratories owns about 98.04% of the entire stake of the company. Everything seemed like a humble start until the company's stock saw big numbered increases in just a matter of 4 months after being relisted. 

Orchid Pharma which traded at Rs. 18 per share at the beginning of November 2020, is now trading at more than Rs. 1129 per share! Yes, you heard it right. This is an increase of a whopping 6160 per cent! The Dalal Street, which took note of it, started drawing parallels with the case of Ruchi Soya and Alok Industry while reasoning out the phenomena surrounding the sudden rally. 

The unexplainable price rally 

Before you try to configure what is going on with Orchid Pharma, let's dig the old story of Ruchi Soya, to understand the situation better.

Ruchi Soya was absorbed by Baba Ramdev's Patanjali group following the NCLT proceedings, which started in 2017 as an answer to a line of bankruptcy proceedings. After it was relisted, it soon became everyone's favourite and its prices sky-rocketed. It set new records and touched new peaks. Soon the stock, which was trading at just Rs.16.5, in months' time, stood at 1500 per stock! That is about a 9000% increase! Gosh! 

So what do you think might have pushed the prices so high? 

The answer is right in front of you, the demand-supply imbalance. A mere 1% of the entire stock of Ruchi Soya was floated in the market for trading while the rest were safely locked in the hands of the promoters. A really low stock supply in the market, when compared to the demand, caused a mirage making the prices rise phenomenally. Note that a similar phenomena happened when Alok industries was taken over by the Reliance group. 

And, reportedly, the same is happening with Orchid Pharma in recent times. 

While there might be a lot of factors for this sudden volatility, the primary reason happens to be the extremely low number of shares in the market. The meagre 2 per cent, which has been allowed to free float in the market, is driving the craze. Adding to that, of the 2% stake, which is let out for the investors, nearly 1% is held by financial institutions and other foreign portfolio investors. Also, the average traded volume of the Orchid Pharma stock stood at a mere 1,788 shares. In other words, the individual stockholders held just about 0.55% of the shares.

This is a perfect instance of disparity of demand and supply. When there was a demand of 135,000 shares (buy orders), only a little to 83 shares were traded in the market (as of November 2020). This created a false image that the stock is highly demanded. When in reality, the supply was just less. And now you know why... 

What might happen now?

SEBI will surely ensure that some restrictions are placed to help in estimating the fair price of the stocks in the near future. But ultimately, the losers are individual investors and newbies who hold no market experience or knowledge. They get carried away by the short-lived situations and dive in with big sums. But when the hype fades away, they will find themselves amidst heavy losses. This can be deduced from the cases of Ruchi Soya and Alok Industries, both of which are now trading at prices far less from their peaks. 

So what should you do when you notice such phenomena?

1. Get back to the basics. Make a thorough analysis of the stock you are going to purchase. An investor should make his decision logically only after thorough research and not on baseless claims.
2. Always stay away from the herd mentality. Sometimes, like a sheep, we follow the market blindly, only to fall into unforeseen potholes. Hence, it is essential that you don't walk blindly on the path laid by someone else; instead, try to figure out things on your own.

To sum up 

So the next time history repeats, make sure you are not the one making the same mistake. Ensure that all your steps are taken calculatedly and logically. As the saying goes, 'fool me once shame on you, fool me twice shame on me'. Don't let the markets fool you.