Indian market fell by about 30 percent in the March quarter which promoters used as an opportunity to raise stake in their own companies, data from AceEquity showed.
There are as many as 96 companies in the S&P BSE 500 index in which promoters raised their stake, and nearly 90 percent of them have fallen up to 60 percent in 2020.
The list includes Dalmia Bharat, Tata Power, Ashok Leyland, Time Technoplast, Bajaj Finserv, PVR, NCC, Indiabulls Housing Finance, and Sunteck Realty.
Promoters raising stake in their own company is essentially taken as a positive move. At a time when Nifty50 fell 30 percent in March quarter most of the companies suffered a double digit fall in the S&P BSE 500 index.
So are these companies worth a look? Should investors shortlist companies to buy where promoters have raised the stake?
“It’s true that the promoters used sell-off as an opportunity to increase their holdings. The promoters of any company buy the shares when they themselves have confidence in the future development of the business or may have any plans for mergers or acquisitions in the long term,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“With the recent bloodbath in the markets, most of these stocks had plunged ranging from 10 percent 61 percent. The investors should note one thing that even at times like this, in the short term the promoters are increasing their stake which shows the confidence in their business,” he said.
Garg is of the view that the promoters will hold their stake for long term say 10-15 years, so if investors want to invest for long terms say 5-7 years, they may consider this as a positive sign.
The above companies’ stocks have been trading at a discounted price and investors may consider these stocks before investing in others, say experts.
More than 100 stocks saw promoters reducing stake:
There are as many as 100 companies in the S&P BSE 500 index in which promoters reduced their stake sequentially in the March quarter that include names like Future Retail, Prestige Estate, Aditya Birla Capital, KEI Industries, Aavas Financiers, IIFL Finance, etc.
Well, yes, if promoters reduced the stake is considered a negative sign. “Barring the financially stressed entity - Future Retail the promoters of the other companies in the above-given names have deleveraged and offered equity stake to Fund Houses to get their house in order,” S Ranganathan, Head of Research at LKP Securities told Moneycontrol.What should investors do? Can this be considered a red flag? Experts feel that investors should try and study the reason why promoters reduced their stake, but if promoters are reducing stake consistently then it could be considered a negative sign.
“Investors can look at this decrease in promoter’s stake as a non-event as there could be various reasons for a promoter to have sold the stake in his own company,” Nirali Shah, Senior Research Analyst, Samco Securities told Moneycontrol.
“Selling in haste could be a wrong move. What investors can do is observe the shareholding pattern for such companies across many quarters to analyze if there is a consistent decrease in promoter shareholding. Only then can it be a red flag,” he said.
What are the other parameters to track?
Well, yes, if promoters raise their stake it is essentially considered a good sign. But, essentially, investors should do their own research along with using these signals to shortlist stocks.
From a technical point of view, investors should also study short term, and long term moving averages to determine the trend of the stock.
“Other than tracking promoter holding one needs to look for the stock prices closing above their respective 200-Day moving average in the recent correction. In reference to same, Lupin not only posted decent gains since April 2020, but has also closed above 200 moving average and could possibly witness fresh momentum from the current levels until 1000 - 1050 mark,” Abhishek Karande, CMT - Sr. Research Analyst, Reliance Securities told Moneycontrol.
“In the given scenario, where volatility is on the higher side, one may also consider stocks that are now entering 52 weeks highs. Coromandel International (CMP 650), Escorts (909) and Cipla (CMP 639) has posted fresh 52 week in the ongoing trend,” he said.
From a fundamental perspective, an increase in promoters holding is a positive sign for the company as the promoters will have all the information about the company.
It means that investors can give a thought about these companies but an increase in promoters holding shouldn’t be the sole reason for the investor to invest in these companies, suggest experts.
“The investors should try to understand the reason for the increase in the promoter’s stake. The reason can be buying the stock is trading at a discounted price, any merger or acquisition, and any private equity is planning to invest shortly etc.,” said Garg of CapitalVia Global Research Limited.
“Apart from this, investors should also consider the economic conditions of the country and how well the company or sector will perform shortly,” he said.Nirali Shah of Samco Securities is of the view that given the uncertainty due to the pandemic, investors should certainly check a company’s free cash flows, debt to equity ratio, interest coverage ratio, provisions, management’s forward-looking statements, promoter’s pledge along with a number of other fundamentals before taking any decision on stocks.
“In this scenario, a top-down approach will be beneficial as certain industries such as airlines have taken a big hit and will certainly experience a deferment in demand for a few quarters. Investors should avoid companies in such sectors until there is more clarity,” she said.
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