Phillip Fisher, the author of Common Stocks and Uncommon Profits, once said: The stock market is filled with individuals who know the price of everything, but the value of nothing.
This holds true for Indian market currently as benchmark indices are scaling new highs while individual stocks are not performing well.
So some promoters used the opportunity of lower stock prices of their respective companies.
In the fourth quarter, promoters in 479 BSE companies raised their stakes, according to data available on exchanges as on April 26. This includes many bluechip companies like RIL, Infosys, Bajaj Finance, Bajaj Finserv, IndusInd Bank, Bajaj Auto, JSW Steel, Tata Motors and Allahabad Bank.
Promoters are usually considered as the best analysts of their own companies. Although reasons for stake hike could be many, it is essentially positive for shareholders as it shows promoters' confidence in the business.
“Whenever promoters raise their stake in any company, it sends a positive message in the market that at a particular price, the stocks seem to be valuable. Promoters only raise stake in a stock when they are confident enough or believe that the near-term outlook is good,” Ritesh Ashar, Chief Strategy Officer - KIFS Trade Capital, told Moneycontrol.
Out of the 479 companies where promoters raised stake, stocks of 65 percent firms fell up to 70 percent, thanks to the broad-based selling seen in the market.
Table: Top 21 companies as per market cap where promoters raised stake in Q4 as compared to Q3 and the returns that the stocks gave YTD
Stocks in which promoters raised their stake despite fall in price include companies like IDBI Bank, Bank of India, Future Retail, Alkem Laboratories, Indiabulls Ventures, Bosch, Dabur India, etc. among others.
On the other hand, promoters reduced their stake in 318 companies on the BSE as of data collated on April 26. These include HDFC Bank, SBI, Wipro, Coal India, IOC, NTPC, M&M and Power Grid.
“The reasons for fall in promoter’s stake can be associated with many factors which can be either good or bad depending upon the intent of such move. For instance, the promoters may sell their stake to raise a fund for the company, especially during a tight liquidity situation, and this fund could get deployed for business,” Dinesh Rohira, Founder, CEO - 5nance.com, told Moneycontrol.
“Further, the promoter may aim to on-board strategic partner through share swap or stake sell which might also led to a fall in stake. However, on the negative side, when the promoter doesn’t find or foresee future growth prospects in the company, they might capitalize on current market price which in most case will be trading in premium,” he said.
Always do due diligence:
Irrespective of good or bad, it is important to do due diligence whenever promoter raises or reduce stake before taking crucial investment decisions.
The increase or decrease in promoter’s stake should not be generalized as good or bad for investment as it could lead to a wrong decision and should be coupled with other factors, but it can be used as the first filter to narrow down your list.
While looking at the increase or decrease of a promoter’s stake in a company, one should also look at the other factors like the quarterly results and the performance of the company, experts suggest.
“The investment decision should follow proper due diligence to evaluate intrinsic value embedded if any through series of analysis. Consequently, it is imperative to stick with the fundamental outlook of the company by doing self-research on the basis of ratios like ROCE, EBITDA Margin, leverage ratio, and cash flow position among others,” said Rohira.
“Only those stocks which fit into those ratios should be part of the portfolio along with favorable on the basis of changes in promoter’s stake,” he said.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.