SKF Bearings, bag bearings, Timken India and NRB Bearings are some of the respectable names in the Indian bearings industry with significant sales (SKF Bearings: Rs 579 crore last year), and handsome double-digit growth (triple digits in the case of NRB Bearings)... And then you have Deccan Bearings, which isn't the most apt of names for this Mumbai-based company-it doesn't make bearings any more. In fact, Deccan Bearings doesn't make anything any more. Ensconced in his second-floor office in one of the century-old buildings in the narrow bylanes of Mumbai's Fort area, Pilaji Parab, Compliance Officer at this Rs 10.5-crore firm, explains: "After the closure of our manufacturing unit in Halol, we are only trading in bearings in the domestic market, which mainly caters to the northern part of India. And the Mumbai office is only for paperwork and settling bills. We have no idea if the company will again start its manufacturing facilities."

Deccan Bearings has its registered headquarters in a corner-office on the second floor of a century-old edifice that still stands in one of the narrow bylanes of Mumbai's bustling Fort area. Step into the dull blue-coloured room, and you're greeted by an office boy sitting at the reception and a sprinkling of staff going about its work. To be sure, there are hundreds of such holes-in-the wall-type of offices in the Fort area, but none could boast the kind of numbers Deccan Bearings has thrown up: A net profit of all of Rs 1 lakh for 2005, and a price/earnings (P/E) ratio of over 1,000 times to boot! Which, in other words, means there are investors out there who would be willing to pay Rs 1,000 for a share of the venerable Deccan Bearings for every glorious rupee of earnings it generates.

Now you'd be delusional to expect such gung-ho growth from any company in the world, but you'd be downright silly to see even an iota of that kind of potential from Deccan Bearings. Reasons? Its manufacturing unit at Halol in Gujarat has been shut for five years. It sources its bearing from suppliers in Rajkot and distributes to its dealers, who cater to the unorganised market. The company also exports bearings to Dubai, where it does not have any fixed buyer. It sells the bearings to a firm that belongs to a relative of the promoter, according to a company official.

Royal Cushion Vinyl Products: Still hopeful of a revival?	Deccan Bearings: Doesn't make bearings any more, no plans either
ROYAL CUSHION VINYL PRODUCTS	DECCAN BEARINGS
NATURE OF BUSINESS: Maker of vinyl floorings BOTTOM LINE TREND: Three years of losses, company now at the BIFR SHARE PRICE APPRECIATION: From Rs 6 in May 2004 to Rs 52 last fortnight COMPANY SOUNDBYTE: Some players are speculating that the company will come out of the BIFR	NATURE OF BUSINESS: Trading in bearings BOTTOM LINE TREND: Falling profits for three years, from Rs 18 lakh to Rs 1 lakh last year SHARE PRICE APPRECIATION: From Rs 50.25 in September 2003 to Rs 82, resulting in a P/E of over 1,000 per cent COMPANY SOUNDBYTE: We have no idea if the company will recommence manufacturing operations

Deccan Bearings-Net profits for the past three years: Rs 1 lakh, Rs 7 lakh, and Rs 18 lakh, respectively. P/E last fortnight: 1,171.

Welcome to the wild and absurd universe of penny stocks, where four-figure P/Es and appreciations in stock price of similar giddy nature don't really elicit emotions of shock or wonder. Yes, there may be a few gems out there, but of the thousands of micro-cap stocks out there (which typically are stocks in the Re 1-Rs 20 range and found mostly in BSE's Z, S and B2 groups), there's little doubt about the fundamental quality of these scrips. "If you think there are pockets of froth amongst the mid-caps, in penny stocks it's all froth," points out Nirav Sheth, Head (PMS), BRICS Securities.

Let not the scandalous movements of this dubious pack make you suspect the robustness of the ongoing bull run, which is still being driven by quality earnings and realistic valuations (the Sensex P/E is still in the 16 region). Yet, every stock market rally, anywhere in the world, inevitably results in the stragglers and fraudsters also joining the party. The biggest attraction of penny stocks is the prospect of quick, fanciful returns, sometimes triggered by the prospect of a turnaround but often fuelled by promoters dabbling in their own stock. And it's not just the common investor who's lured towards these cats and dogs-a number of foreign institutional investors (FIIs) too have taken a shine to them (see The Froth FIIs Fancy). The risk of course is huge, with these stocks tending to eventually drop even faster than they'd risen. Last fortnight, for instance, when the markets turned volatile and the Sensex lost 265.5 points on a single day, the small-cap index fell the hardest, by 460.32 points. In fact, some 1,724 penny stocks witnessed depreciation in the September 21-29 period. Close to 30 stocks couldn't find any takers and were not traded at all. With market watchdog Sebi suspending the promoters and directors of two small-caps-IFSL and Minal Engineering-for trading in their respective stocks, penny punters had decided to call it a day. At least for now.

Yet, Sebi's action against a few suspect promoters may be a case of too little, too late. For, as BT found out, there are many more penny stocks displaying highly irregular trading patterns ever since the current bull run began in mid-2003, with the dubious activity peaking along with the market's new highs. In fact, when the Sensex was around 2,960 levels in April 2003, a little over 90 per cent of the BSE's turnover was in the A group of companies. By the time the 30-share index hit 8,000, that figure had come down to 59 per cent. The total number of companies traded too has increased in this period, from 1,330 in April 2003 two years ago to 2,668 when the index touched 8,000. And, as BT also find out, a number of the penny stocks that have displayed mind-boggling appreciations of 1,000 per cent-plus over the past couple of years-even as the BSE 500 and the BSE 200 have gained just 214 per cent and 192 per cent between March 2003 and September 2005-are actually loss-making, many of them for three years at a stretch. There are plenty of those in the black that enjoy P/Es in the 500-1,000 per cent, despite a consistent trend of declining profitability.

Polar Pharma's Ghatak: Accumulated losses are down	Vista Pharmaceuticals: Settled its dues with IDBI
POLAR PHARMA	VISTA PHARMACEUTICALS
NATURE OF BUSINESS: Condom manufacturing BOTTOM LINE TREND: Two years of losses, accumulated losses of Rs 9 crore SHARE PRICE APPRECIATION: From Rs 2.60 in April 2003 to Rs 66 last fortnight COMPANY SOUNDBYTE: We will break even next fiscal, earn our maiden profit in the year after that and eventually emerge as a global prophylactic leader	NATURE OF BUSINESS: 100 per cent EOU engaged in manufacture of drug formulations ACCUMULATED LOSSES: More than 50 per cent of its net worth. But now, the company has reached a one time settlement proposal for Rs 30 million (Rs 3 crore) of its total dues of Rs 16 crore SHARE PRICE APPRECIATION: From Rs 1.25 in April 2003 to Rs 19 last fortnight COMPANY SOUNDBYTE: We have no control on how the market behaves

Consider Royal Cushion Vinyl Products, formerly National Leather Cloth Manufacturing Co., a sick company with piled up losses of over Rs 100 crore in the past three years. A case with the Board for Industrial & Financial Reconstruction (BIFR) for five years now, Royal Cushion is hopeful of a revival scheme, although no ray of hope is visible in the near term. As of March 2005, the company was saddled with interest charges of Rs 33 crore. Now brace yourself for this: The stock price has rocketed 10-fold in the past 15 months, from a low of Rs 6.25 in May 2004 to Rs 66.5 in August 2005. Current price: Rs 38.80. How does Royal Cushion justify this spurt? Well, it doesn't. It can't. Says Kailash Sharma, Compliance Officer, Royal Cushion Vinyl: "We are also surprised with the sharp surge in stock price of the company. I understand in the bull market some players are speculating that the company will come out of BIFR. Our huge interest burden has been the key reason for the poor financial performance, as the turnover of the company is growing."

The promoters for their part aren't exactly ruing their misfortune. Between December 2004 and June 2005, they offloaded 4.46 lakh shares on the domestic bourses. In the same period, the Royal Cushion stock price surged from a low of Rs 13 to Rs 35.50, a rise of 173 per cent, even as the promoter holding inched downwards from 64.08 per cent in December (or 77.32 lakh shares) to 60.38 per cent by June (72.86 lakh shares).

Royal Cushion isn't the only consistently-loss-making company whose stock is galloping. Consider the intriguing case of the fascinatingly christened Consortex Karl Deolitzsch, once upon a time more humbly known as AP Power Tools. Despite three years of successive losses, the Consortex stock has galloped smartly, from a low of Rs 0.35 in March 2003 to Rs 10.25 in September 2005. When BT attempted to locate the headquarters of the Hyderabad-based company, going by the address on the BSE website, it succeeded in finding the home of the company's promoter, M. Sudhakar Rao. The company is registered in Hindupur (some 700 km from Hyderabad), we're told. Rao, apparently a science graduate in agriculture, wasn't available for comment, as he wasn't in the city. The company's operations are believed to be shut down, but nobody is sure. Nobody is sure either about the status of its tie-up with a German company. The Andhra Pradesh Industrial Development Corp. (APIDC), which has invested Rs 80 lakh in the company, it would appear has little faith in the company, going from what an APIDC official told BT. "For APIDC it has been an equity investment and investment in equity is always risky!" Meantime last fortnight, Sebi got into the act, and banned Rao and four other directors of Consortex from the capital markets for allegedly issuing 15.62 lakh fake shares.

If investors should be cautious about companies with a track record of losses, they should be even more alert when it comes to stocks with erratic trading patterns. Consider Marathon Nextgen Realty & Textiles (formerly Piramal Spinning & Weaving Mills), a company that's riding on the boom in property prices. In a little under 18 months, the stock zoomed 50-fold to Rs 248.85 on August 31, from just Rs 5 on March 5, 2004 (the stock hasn't been traded since August 31). Financials are nothing to write home about, with the company ending 2004-05 with a Rs 31-lakh loss, as compared to a net profit of Rs 21 crore in the previous year (in 2002-03, the company was in the red to the tune of Rs 7 crore). Company managers, though, have a good reason for the surge in the stock price. Says Nilesh Dand, Finance Manager, Marathon Nextgen: "The surge in real estate price and our ongoing real estate development and construction activity has generated interest in our stock. A lack of floating stock coupled with demand for shares has pushed the stock price higher."

Dand may have a point there, but the area of concern isn't so much the justification for the stock price surge but the manner in which it has spurted. In all of 2005 till date, the stock has witnessed just 46 trades, 19 of which were executed on May 25 at a price of Rs 118.80, which is 20 per cent higher than the previous close of Rs 99-which was way back on July 21, 2004! From thereon, the stock has been hitting the circuit filters, with just 50 shares changing hands in every trade.

Deccan Bearings too has a history of erratic trading. Prior to 2005, the stock was last traded on 2003. On September 30, 2003, it closed at Rs 65.25, after witnessing 38 trades on the counter. Only 2,000 shares changed hands on the BSE. Thereafter the stock got traded only on February 16, 2005. Between February 16 and 28, 2005, the stock within commencement of trades was locked at the upper circuit. In this period, the price rose from Rs 78.30 to Rs 190.33, with only 142 shares being traded on the counter.

Marathon Nextgen isn't the only stock that's riding on the bull run in real estate. There's Modern India, a company that says it will be developing some 2 lakh square feet of mill land in south and central Mumbai. The company has been in the red for two years now, and its Company Secretary & Legal Executive says: "Although our new ventures are showing signs of good growth, it's difficult to say as to when the performance of the new businesses will be reflected on the balance sheet, as the losses from the previous businesses (mainly from the machinery of its textile business) will be carried forward for at least three more years." That, though, hasn't prevented the stock from skyrocketing nearly 1,400 per cent, from Rs 10 levels in mid-April 2004 to Rs 152 last fortnight. Punters, it would appear, are taking a call based on the huge tract of mill land the company is sitting on. However, development of Mumbai mill land is still an uncertain matter, which is still in court.

THE MID-CAP MANIA They aren't dubious like penny stocks, but the motley mid-cap bunch may have pockets of stretched valuations.

Financial Technologies' Neralla: Bulish on the company's future The small-cap arena may be littered with far-fetched valuations and over-the-top price appreciation, but the mid-cap space too has its share of mind-bogglers. Consider: Galaxy Entertainment, the stock price of the company has surged by 1,846 per cent to Rs 340.60 in September 2005 from Rs 17.5 in March 2003. P/E: 643 times. The stock prices of Natco Pharma and Kale Consultant have risen by 361 per cent and 380 per cent from their lows in March 2003. Whilst most of the mid-caps that boast steep P/E ratios have a story to tell-many of them in sunrise sectors--there are several ifs and buts that threaten to make the valuations look silly a couple of years down the line if the growth expectations don't pan out. Take Financial Technologies (FT), a stock that has soared 13,400 per cent in the past two years. P/E: 582. Last fortnight the stock was quoting in the Rs 1,315 range. For the year ended March 2005, FT's net profit fell to Rs 9.91 crore from Rs 12.74 crore in the previous year. On consolidated earnings of Rs 20.24 crore (including subsidiaries MCX and IBS Forex), FT's P/E is still 276. Foreign institutions like Fidelity, T. Rowe Price and Goldman Sachs, along with Reliance Capital, have great expectations from FT-they've cornered 1.26 per cent, 5.68 per cent, 1.14 per cent, and 3.98 per cent, respectively, of FT stock. Says Devang Neralla, Director, FT: "We are setting up businesses that will drive the future of our company." FT sees huge potential in the Multi-commodity exchange (MCX), in which it holds 65 per cent of the equity, and a venture with the Dubai Gold & Commodity Exchange (DGCX) is slated to begin in November. A new spot market for commodity trading is also in the works as is a bulk warehouse. It's on the back of such forays that FT is projecting an over 10-fold increase in net profits for the current year, to Rs 220 crore, which will rein in its P/E into a more realistic range of 26.32. Yet, what if volumes in commodity trading dip? What if competing exchanges come up-as is expected in Dubai? That's the nature of many mid-cap valuations today: Huge potential, but then the uncertainty factor isn't negligible either.

Modern India may well be a genuine case of investors riding on expectations of a turnaround courtesy the real estate business, but the danger of such steep appreciation as witnessed in this stock is that a sudden turnabout in market sentiment can leave investors up the creek. Last fortnight, for instance, Modern slumped to Rs 112 after "Terrible Thursday". What's more, typically, after a sudden bout of panic, penny stocks are shunned and activity in them abruptly comes to a halt, as there are no buyers but only anxious sellers desperate to bail out.

Doubtless, there are head honchos who genuinely believe in a turnaround of their companies, and much of buying may be triggered by such prospects. Take, for instance, Polar Pharma, a manufacturer of condoms, whose stock price has gone up from Rs 2.60 to Rs 66. Says ceo Prabir Ghatak: "True, we have been incurring losses over the years. But the positive thing is that our accumulated loss has come down from Rs 35 crore three years ago to Rs 9 crore. Around February 2005, we got a major order from Brazil... Since then the stock has taken off." Then there's Vista Pharmaceuticals, tucked away in Ameerpet in Hyderabad. Promoted by a New Jersey-based NRI, Dhananjaya Alli, Vista has accumulated losses that are over 50 per cent of its net worth. The stock meantime has appreciated 2,682 per cent to Rs 23.65 between March 2003 and September 2005. One possible reason for this bullishness, according to local brokers, is that IDBI has accepted a one-time settlement proposal for Rs 3 crore for settlement of total dues of Rs 16.4 crore. There's still a long way to go for Vista, you would say, but that's the nature of penny stock punters: Hang on for dear life to every shred of good news-which more often than not are baseless rumours-and ride out the boom. It's often a rough ride, as investors who lost their shirt in last fortnight's small cap-collapse will vouch for. After all, investing in penny stocks is as much a gamble as a spin of the roulette wheel: The longer you play it, the more certain you are of losing.

-additional reporting by E. Kumar Sharma in Hyderabad, Kumarkaushalam in Delhi and
Ritwik Mukherjee in Kolkata