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Promoters are selling because they are getting good valuations in a bull market.
Conventional market wisdom is that share sales by promoters can be a sign of the stock being fairly valued, if not overvalued. That is why investors keep a close eye on insider selling. But over the last year, the market appears to have changed the way it looks at promoter stake sales.
Stocks of HDFC Asset Management Company, TD Power System, Jindal Stainless and many others have doubled in the last one year despite promoters offloading anywhere between 9 percent and 24 percent.
“Offloading a small part of their holding in the company, like 4-5 percent, is not something to get worried about. But if the promoters have been consistently reducing their stake over the last few years, then the investors should be concerned and look for some other companies with a more stable shareholding pattern,” an investment banker said on the condition of anonymity.
He further said investors should always look at the financials and valuations rather than trying to mirror the promoter’s actions.
"Promoters are selling because they are getting good valuations in a bull market. Investors should study the underlying cash flows and the fundamentals of the company while investing because that is what is most important," said Purvesh Shelatkar, head of institutional broking at Monarch Networth Capital.
"If the industry tailwind exists and if the earnings explosion is expected, it is an opportunity to buy even if the promoter is offloading stake."
Usually, a high promoter holding is generally considered to be a positive sign, while a low holding can raise concerns about the promoters’ commitment to the company and the quality of their decisions.
“If we analyse the recent sell-off data by Indian promoters it can also be a sale to strategic long-term investors and a few blocks being sold to institutional investors like FII or DII which are being absorbed by bulk and block deals. As a result, we also see DII /FII investors’ holdings also rise equally which is a good sign for long-term investors,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.
From December 2022 to December 2023, promoters of TD Power Systems reduced their stake by over 24 percent, and despite this, the stock has surged 113 percent in the last one year.
The same is the case with HDFC AMC and Jindal Stainless. The promoters trimmed their holdings by 10.2 percent and 11.4 percent, but the stocks more than doubled in the same period.
In all three stocks, the FII stake has increased significantly in the given period.
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