5 promoters who sold their stake before the stock market liquidation
Indian stock markets tumbled. As the economic realities of high inflation and slowing growth set in, the BSE Sensex has fallen more than 10% since its peak in January 2022.
Most stocks fell, with some even approaching their 52-week lows. While now is generally a good time to buy fundamentally strong stocks trading at low valuations, few of them might not be worth your time or money.
These include stocks that are sold by their promoters, the owners of the underlying business. After all, the ultimate insiders, the standard-bearers of the company, decide everything.
They know the true picture of the existing business, they are well aware of corporate governance practices, and they understand business prospects and headwinds.
So if they choose to sell even a small stake in the business, your antenna needs to ramp up.
Sponsors selling their stake in the business can usually mean a lot of things. Maybe all is not well with the underlying business, or the stock is trading at a significant premium to its fair value, or the company’s profitability and growth have peaked. .
Your job is to find the reason and its long-term impact.
So, with that in mind, we outline and study five stocks in which the promoter’s holdings have fallen in recent quarters.
1. Asia Brand Restaurants (Burger King)
First on our list is Restaurants Brands Asia (Burger King). The promoter’s stake in the stock fell from 52.5% in December 2021 to 40.9% in March 2022.
The promoters sold 100 million of their shares to institutional investors through a qualified institutional placement (QIP), leading to a drop in shareholding.
Interestingly, instead of issuing new shares, they chose to sell part of their stake for the QIP. Now, that can be cause for concern. Moreover, given that the promoters reduced their stake in the year following the listing of the company (December 2020).
Listed in 2020, Restaurants Brands Asia (Burger King) is growing aggressively. One of the fastest growing international fast food (QSR) chains in India, Restaurants Brands Asia (Burger King) offers fast food including burgers, fries, rice, etc.
But robust growth comes with losses. As the business expands, the expenses multiply faster than the income, resulting in a loss.
While this is normal for a growing business, it remains to be seen if the business will turn a profit. On a four-year CAGR basis, revenue grew 21%.
Since its listing, the title has fallen to Rs 97, a fall of 38%. Trading at a price to book value (P/BV) of 8x, it is at a steep premium to its industry P/BV of 4.7x.
Next on our list is Coforge. The promoters, Hulst BV, have constantly unloaded their stake in the company, which is very worrying. From 63% in March 2021 to 40% in December 2022, the promoters sold a whopping 20% stake in the company.
Additionally, the offloading of the promoter came at a time when the company was trading at peak valuations of around 50x P/E, a sky-high premium to its median 5-year and 10-year PE of 23.1x. and 12.5x respectively.
This usually indicates that the promoters might think the stock is overvalued and that the trading outlook does not justify the current valuations, causing them to profit from a stake sale.
The business has grown well, recording 5-year revenue and net profit CAGR of 11.5% and 10.5% respectively. Returns were equally strong. The company generated an average 5-year return on equity (ROE) of 19.8%. With zero debt on its book and healthy cash flow, the company has consistently rewarded its shareholders. The average dividend yield over 5 years is 1.6%.
Despite the sale of the stake, Coforge’s share price did not drop significantly. Trading at 31x P/E, the stock price is still above its median 5-year and 10-year PE and the industry P/E of 26.5x.
3. Geojit Financial
Third on our list is Geojit Financial, a leading financial services company, whose foreign owner, BNP Paribas, sold 1.5% of its stake. As a result, the promoter’s total stake fell to 60.6% in March 2022 from 62.1% in December 2021.
Considering it might be a one-time event, that doesn’t raise a big red flag. However, if promoters continue to offload their participation in the future, this could be a concern.
Geojit was founded by MCJ George in 1987 and the major stakeholders in the company are MCJ George and Kerala State Industrial Development Corporation and ace investor Rakesh Jhunjhunwala who holds a 7.5% stake in the company.
The financial services company offers a wide range of products and services such as distribution of mutual funds and insurance, stocks and derivatives, commodities, (portfolio management services) PMS and financial planning .
The business worked well. On a CAGR basis for five years, it delivered revenue and net profit growth of 11% and 22% respectively. From a performance perspective, the five-year average return on equity (ROE) was 12.9%.
The company has been very generous to its investor. Their average dividend yield is around 4.5% over the past five years.
The stock is trading at 1.7x, a discount to its 5-year median P/BV of 2.3x and the industry average of 2.3x.
Fourth on our list is Cipla, one of the largest drug makers in the country. The promoters of the shares, Dr YK Hamied and MK Hamied, recently sold a 2.5% stake in the company for “personal purposes, including philanthropy”. This reduced their stake in the company from 36.1% in December 2021 to 33.6% in March 2022.
The stake amounts to a whopping Rs 18 billion. The company elaborated further by stating that the aging promoters (approximately 80 years old) wish to “use the funds generated from this sale for personal purposes, including philanthropic purposes”.
This sale is probably not very alarming. Considering this is a one-time event and the company’s performance has been solid over the past two decades, the promoters have no reason to leave the company.
Cipla’s revenue and profit grew at a 5-year CAGR of 15.4% and 11.5% respectively, while the 5-year average ROE stands at 10.7%.
Despite the accumulation of cash on its books, the company has not been very generous to its shareholders. The dividend yield was around 0.6%.
The company is trading at a P/E of 29.6x, a minor discount to its historical 5-year median P/E of 32.1x and the industry P/E of 33.1x.
5. HDFC lifetime
Last on your list is HDFC Life. Leading life insurance companies in India, HDFC Life is a joint venture between HDFC and Standard Life Aberdeen. HDFC Life’s shareholding scheme indicates that the sponsor’s stake has increased from 53% to 51%. And while the promoter’s stake fell 2%, the promoters did not sell any percentage of their stake.
The company simply issued more shares to the public, diluting the sponsors’ stake. This was to raise funds to acquire the insurance business of Exide India. Therefore, this decline in developer participation does not warrant a red flag. Moreover, the company is on a high growth trajectory, so there is no reason for the promoters to consider exiting it.
While net earnings have grown well at a 5-year CAGR of 10.5%, the average 5-year ROE stands at an admirable 22.9%. But the stock’s 5-year average dividend yield is 0.5%, matching the industry average of 0.6%.
Currently, the company is trading at a P/BV of 8x, which is a steep discount to its 5-year median P/BV of 16x, but at a significant premium to the industry average of 2.2x. .
There are several instances where promoters sold their stakes and the stock continued to perform well. Therefore, as alarming as promoters are offloading or increasing participation, you need to look at the main reasons for the sale.
Check if the reasons can cause long-term damage or if it is just a solution to a temporary financing problem. Study and analyze the fundamentals of the business to be sure that the reasons you originally bought it are still valid.
(Disclaimer: This article is provided for informational purposes only. It is not a stock recommendation and should not be treated as such.)
This article is syndicated from Equitymaster.com
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)