Is promoter selling always a reason to worry?

1 Apr 2024 , 02:53 PM

Among the many pearls of investment wisdom doled out by the oracle of Omaha, Warren Buffett, one stands out. He believes investors should focus on companies with high promoter’s stake. “In line with Berkshire’s owner orientation, most of our directors have a major portion of their net worth invested in the company. We eat our own cooking”, said Buffett. While this advice has stood the test of times through several ebbs and flows, it does have a few exceptions. More on that, in a bit. 

Often, stake sale by promoters during a bull market are viewed with skepticism by investors owing to several reasons. One, such a stake sale might indicate that the company’s stock is fairly valued. Second, it could reflect the promoters’ bearish outlook (and hence the need to cash out at higher valuations) for the business and the growth prospects of the company. A low promoter holding raises concerns about the owners’ commitment to the business. 

However, reduction in promoters’ stakes can be prompted by several factors including need to comply with the listing norms, buying properties, reducing debt or making room for strategic investments in the company. Hence, promoter selling may not always be a negative sign of things to come. In such cases, the underlying stocks witness healthy rallies, notwithstanding reduction in promoters’ shareholding.

Analysts at IIFL Capital Services recently analyzed shareholdings of companies within their coverage and discovered some interesting facts. During 2023, promoters have reduced stake, while FIIs and MFs have increased stake, in several small and midcap stocks. With FIIs and MFs each pouring in $21 Billion net in Indian equities during the year, their overall stake has risen across market capitalization categories. Promoters on the other hand, have downsized their holdings. Notably, both these trends have been more pronounced in stocks of midcap and small cap companies. The value of FII holdings in NSE500 is now ~$770 Billion. Pledging of promoter holding is a key metric tracked closely by investors. As on December 31, 2023; overall promoter pledge in NSE500 shares dropped by 0.7ppt year-on-year and 0.5ppt sequentially to 2.0%. This metric stood at 4.4% for midcaps (down from 6.4% in December 2022), higher than that of large caps (1.2%) and small caps (2.8%).

FIIs have increased their stake in majority of the sectors in the last year with Private Banks (largely due to HDFC Bank) witnessing the highest jump. Other sectors where FIIs increased stake during 2023 include Internet companies, Building Materials, Defense, EMS and Automobiles. Technology, conglomerates (Adani Enterprise & Reliance), Business Services and Gas Utilities all saw reductions. All in all, FIIs have above average (average being 19%) stake with private banks accounting for the lion’s share (51.1%), followed by Healthcare (32.3%), Internet (32.3%), and Auto (23.6%) sectors. Unlike FIIs, MFs reduced their stake in Defense, Building Materials and PSU Banks, while ramping up in Technology and Gas Utilities. Their above average holdings include stocks belonging to the Private Banks, Pharma, EMS, Auto Ancillary and Construction sectors.

The table below highlights few noteworthy promoter stake reductions in the past one year:

Company	% reduction in stake	Move since sale till 31/03/2024
Inox wind	19%	129%
Kirloskar Oil	18%	122%
Jindal Stainless	11%	245%
HDFC AMC	10%	100%
Ircon	8%	40%

 

As is evident in the above table, all these stocks witnessed a strong surge, ranging between 40% to 129% post the sale of the promoters’ stake. While proceeds from the sale in Inox Wind will help the company pare debt, the exit of promoters from HDFC AMC facilitated its merger into HDFC Bank. The Kulkarni family decided to sell a stake in the Kirloskar group to pursue independent ambitions and interests. The Government of India sold an 8% stake in Ircon through an Offer for sale. JSL and JSHL were merged into a single entity JSL, post which the promoter holding in the combined entity came down to ~57%.

In the last one month, promoters have sold stakes worth more than ₹44,500 Crore. Some of the notable ones are:

Company	Seller	Amount (₹ Crore)	Reason
ITC	BAT	17,485	Share buyback
TCS	Tata Sons	9,362	Debt reduction, funding the semi-conductor capex
Whirlpool	Foreign Promoter	4,039	Reduce promoter debt
Samil	Sumitomo	3,633	Investment management
AB Sun Life Insurance	Ab capital & Sun Life	1,481	SEBI norms on promoter holding
M&M	PMSL	1,832	Liquidity for specific needs
Indigo	Gangwal	6,786	Complete exit

 

Most of the recent stake sales by Indian promoters have been made to strategic long-term investors including FIIs and DIIs. This has led to a rise in FII and DII shareholdings, which is a good sign for the long-term investor. Hence, as discussed earlier, promoters can sell due to several factors but that does not necessarily mean that the stock has reached a peak. One should look at the financials and the valuations of the company before following in the promoters’ footsteps and deciding to sell. In the presence of favourable industry conditions and anticipated earnings growth, it presents an opportunity for purchase even if the promoters are divesting their stake.