30 DALAL STREET INVESTMENT JOURNAL I JULY 22 - AUG 4, 2019 DSIJ.in^
Cover Story
What would be your advise to those investors who are holding
shares of companies where the promoter holding is higher
than 65 per cent?
If the recommendation gets implemented, around 3.3 lakh of
free float is expected to be generated. The proposed regulation
cannot be implemented at once, but it has to be done in phased
manner. Companies with promoter holding higher than 65 per
cent are likely to underperform as excess stock liquidity may
not meet with sufficient demand in all scenarios to ensure price
stability. Until the stakes are sold, those companies will have an
overhang on stock prices, as we have seen that most of the
offers for sale done recently by companies to meet minimum
public holding were done with a discount of 5 to 10 per cent to
the market price. The move may lead to correction as many
companies are trading at premium valuations due to restricted
free float and may result in valuation normalisation. Our
recommendation to investors would be to stick with quality
stocks as in spite of overhang, strong business fundamentals of
such companies will eventually take over the supply pressures
and push the prices back to its premium valuation.
Is it correct that the stocks with higher promoter holdings
trade at a premium due to low free float?
It is true that stocks with low free float tend to trade at a
premium because of demand-supply mismatch. Low free float
stocks tends to have lesser liquidity, which can result in
possible mispricing of the stock. However, in order for a
company to trade at higher premium compared to its peers, it
still needs sound fundamentals as in spite of low free float, the
demand from investors can only come if investors find
business model attractive.Where do you see outperformance in markets coming from?
We expect outperformance to be witnessed in financials,
consumption and infrastructure. The June quarter results have
started and it may be a repeat of March quarter performance,
where the financials took the lead. The domestic consumption
story remains strong and, in the long run, the government's
fiscal discipline will attract foreign capital, which will partially
fund huge infrastructure projects.Dinesh Thakkar, CMD, Tradebulls Securities
The Move To Bring Down Promoter Stakes To 65% May Lead To Correction
MNC Stocks Promoter Holdings Returns (%)1 Year Returns Since 5th July (%)
3M India 75.00 10.05 -3.67
ABB India 75.00 26.71 -2.76
Glaxosmithkline Pharmaceuticals 75.00 -18.73 -2.49
Honeywell Automation India 75.00 28.75 -4.85
Siemens 75.00 27.33 -2.33
Whirlpool Of India 75.00 1.35 -1.87
Kansai Nerolac Paints 74.99 -12.93 -0.37
Schaeffler India 74.13 -15.16 -6.32
Oracle Financial Services Soft. 73.48 -16.34 0.05
Glaxosmithkline Consumer Healthcare 72.46 20.73 -4.63
Procter & Gamble Hygiene & Health Care 70.64 9.48 0.17
Bosch 70.54 -11.06 -2.82
CRISIL 67.45 -20.9 0.7
Hindustan Unilever 67.18 2.67 -4.36When we check the performance of all the stocks with
promoter holdings greater than 65 per cent, we find that on
average these stocks are down by 2 per cent, in line with the key
benchmark performance. This goes to show that markets have
not reacted negatively yet on the announcement and there is no
selling seen in these counters, i.e stocks with promoter holdings
greater than 65 per cent.
Conclusion
In the long run, what matters for the stock prices is the earnings
growth. While earnings growth matters in the long run, the
supply and demand for the stocks also play a crucial role in
price discovery. If the proposal on shareholding as
recommended in the budget is implemented, we all know the
supply of shares will increase manifold and the demand may or
may not keep pace, depending on several factors. Such a
scenario may not be good for the stock prices in general and
definitely not good for those shares where the promoter
holdings is more than 65 per cent.The secondary markets and the primary markets will have to be
extremely robust to absorb such supply of equity to prevent a
drastic fall in the stock prices. Investors, however, should keep
in mind that stocks that are able to deliver superior earnings
growth may not witness heavy fall in prices. In case they do, we
will have an opportunity to grab quality stocks at discounts.At this point of time it is prudent to book partial profits in those
stocks where the promoter holdings exceed 65 per cent. The
portfolio will require a churn and investors can take stock
specific decisions as more updates related to earnings and
shareholdings is available. DS