Your money: Understand why a promoter is hiking stake

It may seem like a confidence call but before buying the stock, check if there are other reasons

No one probably knows companies as well as their promoters. If they hike stake in their companies, it’s a sign that the stock could be trading below its intrinsic value. As an investor, should you look at companies where promoters have hiked their stake?

“It does show an owner’s confidence in the business but it should not be the sole criterion for an investment decision — it can be a starting point. An investor needs to understand the reasons behind the promoter’s decision,” Sanjiv Bhasin, executive vice-president, market and corporate affairs, IIFL. In the past quarter (October-December), about 56 promoters of S&P BSE 500 have purchased more shares in their companies.

When promoters buy shares from the open market, they reduce the floating stock of the company. Chances of price moving higher therefore increase. If extinguished or cancelled, there would be a reduction in the equity capital of the company, which increases its earnings per share and in turn, the stock price.

But analysts say that the decision to increase shareholding can be due to various reasons. The company can be part of a conglomerate, and a larger holding can give a promoter bigger say in the decision-making process. If a promoter wants to pass a resolution in their favour, a larger stake can help influence institutional investors. It can also be because a promoter wants to arrest the falling share price.

The share prices of companies, which have seen the biggest hike by promoters, have not shown improvement. Between quarter ending September and December, PTC India share remained flat at Rs 37, ACC’s stock price corrected 16.71 per cent to Rs 1,328 and HDIL fell 24.81 per cent to Rs 59.85.

G Chokkalingam, founder, Equinomics Research and Advisory, said an investor should consider four parameters before investing in companies where promoters have hiked stake. One, the market cycle: In a bear market, there would be more genuine cases of promoters buying because of business outlook. But in volatile markets like the present or when in a bull market, it could be done only to maintain investors’ interest in the company.  Second, look at the quantum of the purchase — higher the better. 

Third, how long the promoter has been increasing stake. Do look at the past two-three years if promoters have bought more shares. According to regulations, a promoter cannot increase over five per cent stake, and so many of them stagger their purchases. Finally, look at the valuations. Check the price-to-earnings (P/E) the company has historically commanded and P/E at present. If the business outlook remains the same or better, then it would make sense for investors to look at such stocks. “Be sceptical about smaller companies that are not covered by analysts,” said Amit Tandon, founder and managing, Institutional Investor Advisory Services. That’s because, in smaller companies that are not well-known, promoters can manipulate share price.