This firm's share price has crashed 70% since coming to market, and it could be a bargain.
In May 2010, Indian energy company Essar Energy (LSE: ESSR) arrived on the London Stock Exchange, raising almost £1.3 billion in an initial public offering priced at 420p per share.
Float, rise and crash
Essar's shares promptly started rising to a closing peak close to 590p on Christmas Eve 2010. Since then, the oil and power group's share price has spectacularly crashed back to Earth.
Yesterday, Essar revealed that it had lost a tax dispute in the Indian Supreme Court. As a result, its shares nosedived, falling below 108p, before bouncing back to close at 127p. This one-day fall of more than a quarter (26%) piles yet more woes on Essar's suffering shareholders.
For the record, the FTSE 100 firm has lost 70% of its value since coming to market 20 months ago. By my reckoning, that's the worst performance of any Footsie company in less than two years since the 100-share index was created in 1984!
So long, FTSE 100
In a much-needed relief rally, Essar bounced back today.
As I write, its shares have leapt more than 11% to just above 141p. At this price, the energy provider has a market value of £1.84 billion, so it is still a substantial entity. Nevertheless, having lost the majority of its value since floating, Essar is sure to be relegated to the mid-cap FTSE 250 index at the next quarterly FTSE reshuffle.
Alas, Essar stands as yet another example of the risks of investing in emerging-market businesses. Yesterday's $1.2 billion tax ruling is just the latest in a long line of awkward announcements from the Indian firm.
In addition, the group has been hit by delays in building power plants, plus problems with securing forestry licenses needed to mine coal. Just last month, its chairman and co-founder temporarily left his post in order to face an inquiry into his possible involvement in irregularities surrounding the granting of Indian telecommunications licences.
An Indian takeaway
What's done is done, so those brave souls who bought shares in Essar at the float (against my advice) are unlikely to recoup their 420p a share during 2012.
Of course, what matters now is whether Essar is worth buying today, at the current price of 141p. Based on forecast earnings per share (eps) of 11.2p for 2011, its shares trade on a price-to-earnings ratio of 12.6 and pay no dividend. This is hardly attractive to value investors.
However, Essar's eps is predicted to more than double to 25p this year, giving a forward rating of just 5.6. If correct, this is a very low rating for a growing company in any sector, particularly in the go-go realm of emerging-market energy supplies.
Hence, a modest punt on Essar might just produce great gains, especially if it wins an appeal against the adverse tax ruling.
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