Promoters raise stake in 80 companies in last 4 quarters; should you follow suit?

Having beaten-down stocks in your portfolio might scare an investor but for some promoters, it comes as an opportunity to accumulate their own stocks at a much lower price. A missed opportunity for some, maybe!

Bloodbath in the small & mid-cap space left many investors high and dry in 2018 and the trend seems to be continuing in 2019 as well. Data suggests that promoters used the opportunity to increase their stake not just in the last quarter but also in the last four quarters consistently.

Promoters raised their stake consistently in as many as 80 stocks on the BSE in the last four quarters, data from AceEquity showed. As many as 62 out of 80 stocks fell up to 80 percent in the last year while only 18 gave positive returns in the same period.

Most of the stocks in the mid & small-cap space witnessed a massive sell-off in 2018, thanks to re-categorization of schemes introduced by SEBI, and  corporate governance issues in some companies also spoiled the sentiment. And, persistent selling by foreign investors dried up liquidity.

Stocks in which promoters raised their stake include Garnet International, Manpasand Beverages, Kitex Garments, MRF, UPL, Bajaj Holdings, Atul Auto, GMR Infra, Raymond and Ashoka Buildcon.

AceEquity has collated a list of 16 stocks, having a market cap of over Rs 1,000 crore, in which promoters raised their stake consistently in the last four quarters:

(Note: The stocks mentioned are for reference only and not buy or sell ideas)

“Promoter raises stakes only when he is confident about his company’s growth prospects in near future or they have seen major economic expansion ahead because of government's well being in that particular sector,” Debabrata Bhattacharjee, Head of Research, CapitalAim told Moneycontrol.

“Investors have to consider one point, that if promoters don’t have their future expansion plans and they have reserves in their balance-sheet so they prefer to buy-back shares,” said Bhattacharjee.

What are the other parameters to track?

Atish Matlawala of SSJ Finance & Securities is of the view that nobody knows the company better than the promoter, hence, increasing stake by the promoter is generally a good sign but investor should also do proper due diligence before investing.

Investors should do some inquiry as to what caused the fall in the stock price. If the fall in the price is due to corporate governance issues then investors should avoid the stock and if it was due to external factors then they should evaluate the stock on other parameters as well before pressing the buy call.

“When we say promoters are raising stake in their company it is their call and they, of course, see some intrinsic value in their company which general public may have ignored or doesn’t know about. However, we as investors, need to be rational and can only make decisions based on a scientific approach,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

“We should especially keep a tab on quarterly numbers and positive news flow in that stock. It could be a big deal or a turnaround, expansion in EBITDA margin, increase in bottomline or EPS. It is very simple to get this information these days,” said Nadeem.

He further added that it makes sense to evaluate other fundamental parameters and only then I would consider that this may be the reason why promoters might have increased their stake and that can justify my investment in that stock.