Sharp price run in 2 months prompts 27 firms to split stocks

Though a split makes the stock more affordable for the investors, experts say investors should also look at the company's fundamentals before investing

Twenty-seven companies, including Bajaj Finance, Grasim Industries, 8K Miles Software Services and Karur Vysya Bank, have approved a sub-division of the face value of equity shares to lower denominations in the past two months, following a sharp run in prices.

Thus far in the current financial year 2016-17 (FY17), 45 companies have already announced a stock split, while three companies — KPR Mill, Capri Global Capital and KNR Constructions — will consider the move in the next two weeks, data show.

By comparison, 48 companies had announced a stock split during the first six months (April-September) in FY16. In the current calendar year 2016 (CY16), 65 companies have announced a stock split, against 68 in the corresponding period last year.

A stock split is a decision by a company’s board to increase the number of shares that are outstanding by issuing more shares to current shareholders. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

For instance, Bajaj Finance recently sub-divided its equity shares with face value of Rs 10 each into equity shares with a face value of Rs 2 each. It also issued bonus shares in the ratio of 1:1. The stock has appreciated 90 per cent to Rs 1,127 on Friday, from Rs 593 on February 29. According to the company, the rationale behind the sub-division was to improve liquidity and also make them affordable to small investors.

Another company considering a stock split is Maruti Suzuki. R C Bhargava, chairman, Maruti Suzuki India, at the company’s 35th annual general body meeting (AGM) held recently, said shareholders’ request for a stock split will be put up before the company’s board for consideration. He was responding to a query from one of the shareholders, who raised the concern that small retail investors could not afford to buy the company’s shares after a sharp surge in its market price.

In the past three years, Maruti has appreciated 302 per cent, compared to 44 per cent rise in the BSE Sensex. The stock hit a lifetime high of Rs 5,630 last week, appreciating 74 per cent since March, against a 25-per cent rise in the benchmark index.

“Stock splits usually happen in a bull market, as many promoters also want to retain the wealth created by the secondary market. Giving out bonuses and splits is just another way of creating wealth in the hands of the shareholders. A split will help Maruti consistently grow its market capitalisation (market-cap), given that it is going well fundamentally,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

INVESTING STRATEGY

While a split makes the stock more affordable for investors, experts say they should also look at the company’s fundamentals before putting in their hard earned money. They must look at a proportionate growth in the bottom line of the company before investing in such stocks, analysts suggest.  “What really creates wealth for the shareholders is not bonuses and splits, per se. A split or bonus with a consistent growth in the bottom line is what investors should look at before investing in such counters,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.