As many as 65 stocks in which promoters maintained their stake in the January-to-March quarter rose 150-900 percent in the last one-year, data compiled from AceEquity shows.
Companies in which promoters held on to their stake have given multibagger returns in the last one year. As many as 65 stocks in which promoters maintained their stake in during January-March rose 150-900 percent in the last one-year, data compiled from AceEquity shows.
Stocks like HEG, Godawari Power, Graphite India and Dolat Investment gained 914 percent, 444 percent, 525 percent and 659 percent, respectively. Most stocks belong to the small and midcap space where capital requirements change in a short span of time and pledging of shares is a common practice.
As many as 161 companies on the BSE whose share prices more than doubled saw their promoter holding staying steady. Companies in which promoters have not resorted to increase or decrease their shareholding indicates stability in the company which in turn is reflected in its stock price.
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“Before taking an investment decision, identifying promoter’s stake in the company is a crucial element to examine the soundness of the business, apart from financial ratios. Since pledging shares to the lender is common in business, a study of patterns in which it is executed or pledged is important for investors,” Dinesh Rohira, Founder and CEO at 5nance.com, explained.
He added that though pledging creates long-term value for the business, it leads to high stock price volatility as it indicates management inability to generate working capital requirement from business operations. “Steady stake in the business creates a value proposition from the management’s perspective and wellness of ongoing business operation. It indicates better times ahead for the business.”
Apart from getting a big thumbs up from investors, most of these companies enjoy healthy credit quality which makes them borrow at a relatively lower rate in comparison to an entity with a fluctuating promoter holding.
Experts feel investors should not ignore stocks in which promoters have raised their stake. As many as 28 companies saw promoters raising their stake in the March quarter when compared to the December quarter.
These companies include Bhansali Engineering, GNA Axles, Indiabulls Ventures, Minda Industries, Shakti Pumps etc. among others.
Ritesh Ashar, Chief Strategy Officer at KIFS Trade Capital, said investors looking to buy into a stock should see if the promoters have increased their holding, which is a positive. "Promoters are also investors and look for bargains to increase their stake when they are confident of a company’s business potential. Though this is an indicator, it is not the only indicator to assess whether to buy or not.”
In Q1 CY18, a report pegged the value of shares pledged by promoters of BSE-listed companies at Rs 2.40 lakh crore, a decline of 20.8 percent quarter-on-quarter.
So, what should investors do when promoters start pledging their stake? Experts say though this is a normal business practice undertaken by promoters to meet a company’s working capital needs, it is important to study past patterns. 5nance.com’s Rohira also shares this view.
Reduction in promoter holding
A number of promoters have used the recent market rally market to pare their stake. Besides uncertain market momentum, profit-booking at higher levels has been one factor behind the fall in promoter stake, experts suggest.
As many as 36 companies saw a fall in promoter holding in the March quarter. These include V-Mart Retail, MIRC Electronics, Jindal Steel & Power, Prakash Industries, NOCIL, NIIT Technologies etc. among others.
KIFS’ Ashar feels it is important to find out the reasons for such a low/high holding and then take a necessary call on current or future investments. “Where the stake sale is in favour of the company it is a positive signal.”