Royal India: This penny stock gained 2474% in 3 years, gave positive returns in all months this year; should you invest?

Penny stock Royal India Corporation has given stellar returns to its investors in the long term. The stock has skyrocketed 2474 percent in the last three years from ₹0.93 in May 2021 to currently trade at its 52-week high of ₹23.95.

The stock has consistently hit its 2 percent upper circuit since March 14, 2024. This year so far, the stock has given negative returns in just 12 sessions. All 5 months of the current calendar year have been in the green for Royal India. It has jumped 45 percent in May after a 47.5 percent rise in April, 39 percent in March, 49 percent in February and 35.6 percent in January.

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In the last 5 years as well, the stock has given multibagger returns, rallying 1518 percent from ₹1.48 in May 2019. Meanwhile, in the last 1 year, it has surged 508 percent while it rose 502 percent in 2024 YTD.

However, it is important to note that the stock is currently trading under ESM: Stage 2 and GSM Stage 0.

What is ESM?

The Enhanced Surveillance Measure (ESM) is a regulatory framework implemented by the National Stock Exchange (NSE) in India. It aims to enhance monitoring and surveillance of listed companies to ensure investor protection and market integrity.

Under Stage I, the trading of the securities is settled through a trade-for-trade mechanism with a price band of 5 percent, or 2 percent.

Under Stage II, the surveillance action permits trading on all trading days under periodic call auctions with trade-for-trade settlement and a 2 percent price band. Earlier this stage permitted trading just once a week.

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What is GSM?

Graded Surveillance Measures (GSM) are used to monitor and control unrealistic price and demand increases in company stocks that do not align with the company's financial health and fundamentals. This system assigns grades to corporations to alert investors about potential stock price manipulation.

The regulator initiates these measures upon detecting unusual price swings, which may indicate that a company is functioning as a "shell company" to inflate its stock price. This approach helps investors identify which stocks might be worth avoiding due to these irregularities.

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About the firm

Royal India Corporation Limited engages in the wholesale trading of gold bullion, plain gold jewelry, gold coins, and medallions in India. The company was formerly known as Natraj Financial & Services Limited and changed its name to Royal India Corporation Limited in October 2006. The company was incorporated in 1984 and is based in Mumbai, India.

Earnings

In the December quarter (Q3FY24), the company posted a net loss of ₹3.74 crore as against a net profit of ₹4.94 crore in the same quarter last year. Meanwhile, its total income declined 66.5 percent YoY to ₹9.86 crore in the quarter under review as against ₹29.49 crore in the same quarter last year.

Sequentially, the company's net loss increased from ₹1.57 crore in the previous September 2023 quarter (Q2FY24). However, its revenue rose 67.4 percent from ₹5.89 crore in Q2FY24.

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Brokerage view

According to domestic brokerage house ICICI Direct, Royal India Corporation demonstrates strong momentum, with its stock price consistently above short, medium, and long-term moving averages. The stock also reached a new 52-week high today. Additionally, the company has efficiently managed its assets to generate profits, as evidenced by an improving Return on Assets (ROA) over the past two years.

Meanwhile, its weaknesses, as per the brokerage are -

- Red Flag: High-interest payments compared to earnings

- Degrowth in quarterly revenue and profit in recent results (YoY)

- Declining profits every quarter for the past 2 quarters

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Investing in shares of small companies with low market capitalisation offers the potential for substantial gains due to their lower stock prices. However, this investment path comes with significant risks. These stocks often face limited liquidity, leading to fewer transactions compared to larger counterparts. Additionally, they typically lack the rigorous financial reporting and oversight seen in larger corporations, making them susceptible to price manipulation and fraudulent activities.

The constrained liquidity and reduced oversight result in increased volatility for small company stocks, heightening risks for investors. Therefore, conducting thorough research and implementing careful risk management strategies are essential to navigate the uncertainties associated with these stocks and mitigate potential losses.

Disclaimer: This story is for educational purposes only. Please speak to an investment advisor before making any investment decisions.