Promoter Holding: More The Stake, Merrier The Prospects

Promoter Holding: More The Stake, Merrier The Prospects

While analysing stocks, one of the most important aspects to focus on is the promoters' holdings in the company.Yogesh Supekar and Nikita Singh find out how stocks have performed after steady increase in promoters' holdings

Investors in pursuit of enhancing their returns and beating the benchmark indices constantly look out for stock-specific developments that drive the stock price upwards. Undeniably, the patterns of promoters' shareholding provide a weighty insight into the health and prospects of a company and its stock.

As believed in common practice, most of the times, a growing stake of the promoters in the company is considered as a positive development and a comforting factor for the investors. While the shareholding patterns of a promoter usually provide us with a hint of the direction in which the stock will be headed, it is important to read between the various aspects concerning the promoters' shareholding patterns.

The simple logic that cannot be debated is that promoters know their company inside out and that they are in a position to assess the financial condition of the company better than any other financial expert. When the promoters themselves are betting on the future of the company by increasing their stakes, such a development can send positive signal to the shareholders and have a salutary effect on the stock prices.

Says Siddharth Oberoi, Founder, Prudent Equity "Promoter's stake is considered by investors as a vote of confidence on the company. Promoters are generally the largest shareholders in their companies. Since they usually are the driving force of their respective companies, it is natural that they know more about the company's prospects than other investors. Thus, it is pertinent to keep a tab on their buying pattern in the company's shares." While an increasing promoter holding is a good sign for an investor, it will be foolish to suggest that it guarantees good returns in the stock and that the stock may outperform the broader markets. Several factors will be influencing the stock's price, including promoters increasing their shareholding which increases demand for the shares.

The average promoter shareholding for BSE 500 companies have come down to 54.71% in September 2017 from 56.21% in September 2014

PROMOTER HOLDING FOR BSE 500

If we consider the data for the BSE 500 index for over three years, there have been at least 126 companies that have seen increase in promoter holdings, while there have been at least 228 companies that have seen promoter holdings decrease over the same period. For 93 companies, the promoter holdings have remained unchanged. For the 126 companies that have seen increase in promoter holdings, the average returns over the past three years have been 122 per cent and for those companies where the promoter holdings have gone down, the average returns over the past three years have been 96 per cent. For the 93 companies in the BSE 500 index where the promoter holdings have not changed in the past three years, the average returns have been around 95 per cent. If we consider top 20 BSE 500 companies which have seen increase in promoter

Investors must keep a tab on what promoters are doing as the promoters are generally the biggest shareholders in their companies and are also the most cued in on the company’s future direction and prospects.

Haresh Mehta
Chief Institutional Trader, First Global 

By and large, there is no one thumb rule to analyse the change in promoters' stake. Generally speaking, increase in promoters stake is considered a positive sign for the stock's future prospects. However, this logic does not work all the time. An investor should always look for the reasons for the increase in stake and the category of the stock. I believe that rising stake logic works more for "small and mid-cap" space and less for large-cap stocks. On the same lines, selling of stakes by promoters should not always be considered a negative sign for the company. For instance, companies like HDFC, LNT, ICICI contain very less promoter holdings. Despite this, the stock performance and returns have been very attractive in absolute as well as relative terms in the past few years. Generally, what we have seen in the past is that most of the time promoters increase their stakes when their stock price is trading below its "book value" or when its market value has seen a huge downfall. However, this should not be the sole reason to jump into the stock and buy in a hurry. One should always try to find the reasons for the stake increase, read the promoters commentary, etc. Also, it is advisable to wait for a couple of quarters and study the numbers and check for further improvements in fundamental parameters.

shareholding in September quarter over June quarter in 2017, we find that the average returns for these set of stocks is 30 per cent, which is a market beating return.

PROMOTER HOLDING FOR SMALL-CAP AND MID-CAP STOCKS :- 

In the small-cap space, stocks with high and increasing promoters' shareholding have charted an impressive growth on the bourses since July till date. The top 20 small-cap companies with highest promoters' shareholdings recorded an outstanding average return of over 69.93 per cent from July 1 to December 5, 2017. The average return of these small-cap companies surpassed the returns of major benchmark indices and broader market indices by an overwhelming margin. At the forefront of the small-cap stocks, HEG Limited with a promoters' holding of 61.04 per cent recorded an exemplary return of 359.78 per cent for the corresponding time period. Balaji Amines with 54.55 per cent promoters' shareholding recorded a return of 91.12 per cent and Sharda Energy & Minerals with about 71.9 per cent promoters' shareholding recorded a return of over 81 per cent for the specified period. In general, small-cap companies with increasing and over 70 per cent shareholding of the promoters have recorded over 40 per cent returns for the July 1 to December 5, 2017 time period.

If we consider a three-year period, the number of small-cap companies (small-cap index constituents) which saw increase in the promoters' holdings is 27 and their average returns is 137 per cent. The companies with high and increasing stakes of promoters in the mid-cap space also outperformed the Indian benchmark indices and the broader markets by a decent margin during the July 1 to December 5, 2017 time period. These stocks recorded an average return of 21.21 per cent for the corresponding period, with Bajaj Holdings & Investment topping the pack with a return of over 37 per cent since July 2017 till date. Bajaj Holdings & Investment, a NBFC, boasts of promoters' shareholding of 44.25 per cent. Meanwhile, S&P BSE Sensex recorded a return of just 6.08 per cent, during the corresponding period. Broader market indices Small-cap index and Midcap index recorded a return of 16.28 per cent and 14.80 per cent, respectively, during the July 1 to December 5, 2017 time period.

Pankaj Karde, Head- Institutional Sales & Sales Trading, Systematix Shares 

How do you view promoters increasing their stakes in the company? Why is it considered positive for the stock? Historically have those stocks done well where we have seen promoter-holding increasing? 

Promoters increasing their stake in the company is considered as positive indication. The people who run the company are the best to ascertain the upside potential. But this may not be true in all cases. The investor has to find out the reason for the promoters increasing stakes. Also, if the promoters are increasing their stake on more than one occasion, it should be long term positive. The promoters can increase stake for multiple reasons
a. When they believe that the share price is not reflecting the true potential of the company
b. When the promoters are holding lesser stake and they want to increase the stake
c. When the promoters want to add confidence in the shareholders
d. When there is a restructuring in the company
Historically companies do well as compared to other companies where the promoters increase their stakes. But this is not true for all stocks. This is a long term positive. 

According to your research, is there any pattern emerging when it comes to promoters holding in companies? 

What I have seen is that stocks that have underperformed see some promoter buying to provide confidence. Also, the price at which the promoters buy stake act as a good support level for the stock.

PENNY STOCKS AND PROMOTER HOLDINGS: - 

Investors have always had a liking for penny stocks and are keen on identifying an investment opportunity in the penny stock space. We thought it will be interesting to identify such penny stocks which have seen promoters' holdings increase over the last three years and see how these have performed in terms of share price.

In all, there were nearly 66 companies that saw promoters increasing their shareholding by more than 100 per cent in the previous three years. Out of these 66 stocks, we could identify seven stocks which qualify as penny stocks. On an average, these seven stocks managed to deliver an impressive average annualised returns of 139 per cent.

There is a clear case to study the fundamentals of such penny stocks where the promoters are increasing their stakes in the company on a consistent basis.

PROMOTERS SELLING STAKES: A NEGATIVE FOR THE STOCK?

Just as promoters increasing their stakes in the company is considered positive for the stock price of the company, the common misconception among retail investors is that it is disastrous for the company when the promoters are offloading their holdings and hence the stock price will tank. We find that this is not always the case, as is also seen in the table above, which suggests that in nearly 228 companies of the BSE 500 index, the stock price performance has been impressive in spite of promoters selling their stakes in the company.

It is important for an investor to analyse what is happening with the shareholding pattern and why, if at all the promoters are selling their shares in the company.

PROMOTER MAY BE SELLING STAKES FOR ANY OF THE FOLLOWING REASONS : - 

1. Booking small profits 2. Raising funds for some project expansion and better investment opportunity 3. Promoters may sell stakes for some personal reasons, including philanthropy 4. Promoters do not see bright future prospects in the business 5. Conflict of interest between promoters (small vs big) 6. Promoters may be selling stakes to retire debts 7. Bankers selling pledged shares of promoters 8. Promoters may sell due to overall negative sentiment in the market 9. Promoters are required to sell stakes mandatorily in accordance with the regulatory guidelines, as in case of Kotak Mahindra Bank.

Investors need not panic and press the sell button on becoming aware that the promoters are selling stakes in the company. Kotak Mahindra Bank is up by more than 103 per cent in three years even as the promoters have reduced their stakes in the company during these three years. Bajaj Auto is another stock that saw its price gaining even as the promoters decreased their stakes. The reason why the promoters sold their stakes is as important to know as it is to know whether the promoters have increased or decreased their stakes in the company. Only upon analysing the reasons behind the action should one take a decision whether or not to exit from the stock.

SECTORS WHERE PROMOTERS INCREASED THEIR STAKES:- 

In the Information Technology sector, Intellect Design Arena recorded a 6 per cent hike in the promoters' shareholding in the second quarter of financial year 2018.The promoters' shareholding of Majesco Limited and Nucleus Software Exports increased as well. Thesestocks have recordedexcellent returns of 71.95 per cent and 67.55 per cent on the bourses since July 2017 till now.

Among other sectors recording increase in promoters' shareholding, the packaged food sector's Future Consumer and Parag Milk Foods Limited witnessed a hike in promoters' shareholding by 2 per cent and one per cent, respectively. Future Consumer witnessed a surge of 90.91 per cent, while Parag Milk Foods Limited recorded an increase of 12.21 per cent on the bourses since July 2017 till date.

In the auto parts manufacturing sector, Minda Industries, Rane (Madras) and PPAP Automotive witnessed an increase in their respective promoters' shareholding during the second quarter of FY18. Minda Industries surged by 75.94 per cent, Rane (Madras) by 37.06 per cent and PPAP Automotive by 41.83 per cent on the bourses from July 2017 till date.

In the pharmaceutical sector, Alkem Laboratories and Hester Biosciences recorded a hike in the promoters' shareholding during the second quarter of FY18. The stocks recorded a return of 14.22 per cent and 42.16 per cent, respectively, on the bourses since July 1, 2017. In the industrial goods sector, HEG, WPIL and Elecon Engineering Company witnessed a hike in the promoters' shareholding during the September quarter. HEG Limited recorded a return of 359.79 per cent on the bourses since July 2017 till date,while WPIL and Elecon Engineering Company recorded returns of 46.2 per cent and 49.65 per cent, respectively, during the corresponding period.

CONCLUSION: - 

It is clear that stocks where promoters are increasing their stakes are seeing good amount of price appreciation and that investors can benefit immensely if they focus on the promoter shareholding pattern QoQ. The impact of increase in promoter shareholding is more visible in small-cap stocks and mid-cap stocks as is seen in the phenomenal outperformance of the stocks in the space where the promoter holding has increased in the second quarter. Promoters increasing stakes in their own company is like gaining insider information on the company. It may well happen that the stock prices react positively after one or two quarters post acquisition of shares by the promoters, so investors are well advised to stay invested for three to four quarters in these type of companies where the promoters have increased their stakes.

Following are the two stocks that have seen promoters increase their stakes in the companies and qualify as "Buy" after looking into their fundamentals:

GRASIM INDUSTRIES LIMITED
BSE CODE :500300
Face Value:Rs.2
CMP: Rs.1115
Market Cap 50,780.59 F F (Cr.)

Grasim Industries Limited is an Indian building materials manufacturing company based in Mumbai. The company is a subsidiary of Aditya Birla Group, which operates over 40 companies in 12 countries on four continents. It ranks among India's largest private sector companies. The various segments of the company include viscose staple fibre, chemicals, cement and textiles. The company is India's pioneer in viscose staple fibre (VSF) with plants located in Madhya Pradesh, Karnataka and Gujarat.

On the financial front, the net sales of the company increased 46.85 per cent to Rs.4037.27 crore in Q2 of FY18, as against Rs.2749.18 crore in the same quarter of the previous year. The company's PBDT increased 9.63 per cent to Rs.957.25 crore in Q2 of FY18 on a yearly basis. The company's net profit decreased 3 per cent to Rs.574.5 crore in Q2 FY18, as against a net profit of Rs.592.27 crore in Q2 of the previous year.

On an annual basis, the company's net sales increased 25.31 per cent to Rs.11252.95 crore in the FY17 on a year-on-year basis. The company's PBDT increased 52.68 per cent to Rs.2571.08 crore in FY17, as against Rs.1683.88 crore in the previous fiscal. The net profit of the company increased 63.64 per cent to Rs.1560 crore in FY17 as against Rs.953.27 crore in the previous fiscal.

On the valuation front, the company maintained a PE ratio of 18.26x. The company's return on equity (RoE) and return on capital employed (RoCE) stood at 9.34 per cent and 16.06 per cent, respectively. The company has reduced debt. Also, the promoter's stake in the company has increased. We recommend our readerinvestors to BUY the stock.

GODREJ AGROVET
BSE CODE :540743
Face Value:Rs.10
CMP: Rs.547
Market Cap 1,259.67 F F (Cr.)

Godrej Agrovet Limited (GAVL), a part of the Godrej group, is one of India's largest agri-conglomerate companies. It has operations across five business verticals, namely, animal feed; poultry and processed food; crop protection; oil palm and dairy.

GAVL has huge opportunity in the market for animal feed and processed poultry since large parts of these segments are still unorganised. Rising levels of hygiene awareness among consumers as well as demand for packaged food is expected to lead to high growth in GAVL's poultry business. The company's crop protection business is expected to be driven by robust growth in the fungicides and herbicides business, along with increased consumption of pesticides in India.

The oil palm business is also expected to gain traction from improving economic conditions, rising living standards, and changing eating habits in emerging countries, and growing demand for vegetable oil as a feedstock for bio-diesel production. Also, the dairy segment outlook is lucrative with GAVL's thrust on value-added products, which could lead to an improvement in its margins as well as higher growth.

On the financial front, the company's net sales stood at Rs.2805.85 crore during the 6-month period ended September 30, 2017 as compared to Rs.2767.04 crore during the same period last fiscal, increasing by 1.40 per cent. The company posted 6.13 per cent increase in net profit at Rs.161.09 crore in Q1 of FY18 as against Rs.151.79 crore for the 6-month period in FY17. On the valuation front, the company maintained a PE ratio of 34.07x.

The company's return on equity (RoE) and return on capital employed (RoCE) stood at 26.80 per cent and 17.76 per cent, respectively. The company has a healthy dividend payout of 37.66 per cent. It has also reduced debt. Also, the promoter's stake in the company has increased. Considering the current market trend, we expect GAVL to soar.