4 Popular Companies with 100% Promoter Pledging. Should You Stay Away from Them?

Does pledging of shares by promoters per se indicate a red flag in the company?

Is promoter pledging a bad thing?

If you would have invested in popular stocks such as Vedanta, Thyrocare Technologies, and the like, you may have given the above questions a thought.

That brings us back to the question - is promoter pledging a bad thing?

Absolutely not.

After all, promoters need funds and they use their shareholding in the company to offer as collateral.

But there are two sides to every coin.

In case of promoter pledging, if the company's promoters are redeploying these funds into the main business, there shouldn't be an issue and it should bode well.

But if the loans are being taken for personal needs, then it should be treated as a warning signal.

From a retail shareholder's standpoint, a high amount of pledging with bad financials could lead to the banks or financial institutions (who hold these shares as a collateral) to dump them to recover their dues.

This, in turn, would have a cascading effect on the stock price.

In this article, we take a look at four popular stocks which have 100% promoter pledging.

Starting with Vedanta...

#1 Vedanta

Vedanta is a diversified natural resource group engaged in exploring, extracting, and processing minerals and oil & gas. The group engages in the exploration, production and sale of zinc, lead, silver, copper, aluminium, iron ore, and oil & gas.

Apart from this, Vedanta's other businesses include commercial power generation, steel manufacturing and port operations in India as well as manufacturing of glass substrate in South Korea and Taiwan.

As of December 2021, Vedanta's promoter pledging stands at 99.99%.

It was in September 2020 when the company's promoter entities decided to pledge all of their shares to service debt and acquire more shares. Prior to that, promoter pledging in the company stood at NIL.

A regulatory filing from last year showed that promoter group firms pledged 2,422.6 m shares or 65.18% shareholding in Vedanta in three facility agreements to raise the money.

Note that promoter holding in Vedanta has steadily increased over the past two years. In March 2020, Vedanta's promoters had 50.1% stake in the company. Today, the same figure has increased to almost 70%.

While you may think promoters upping their ante in the company is positive, several analysts have said otherwise.

Here's Nomura,

• 'The cost of comfort is a large debt addition at a high cost. The latest stake acquisition will take Vedanta Resources' holding company debt to more than $10 billion, per our estimates'.

Insider buying has also raised other opinions. Many say that all this will lead to a delisting of Vedanta.

The company's management recently had an analyst meet where they talked about capital allocation, capex, mergers, and more. They explained how they will bring net debt lower.

Vedanta Resources has US$3.7 bn of debt which matures in fiscal 2023 out of which US$1 bn is due in July this year. The management said it will be repaid or refinanced well ahead of maturity, possibly via dividend.

In case of Vedanta, high promoter pledging should not worry you as long as commodity market is booming, and the company is enjoying certain tailwinds.

#2 Thyrocare Technologies

Next on our list we have a Mumbai based diagnostic company Thyrocare Technologies.

The company is engaged in the business of healthcare industry. It's involved in providing quality diagnostic services at affordable costs to patients, laboratories, and hospitals in India.

Last year, online drugstore PharmEasy, which is scheduled to come out with its IPO this year, bought a 66% stake in Thyrocare for Rs 45.5 bn.

As of December 2021, promoters of the company Docon Technologies hold a 71.2% stake, or 37.7 m shares, all of them being pledged. Docon is a 100% subsidiary of PharmEasy.

According to BSE filings, the company promoter has pledged shares to help repay the debt taken by its group companies.

As per a report, the collateral value of the shares was more than 3 times the loan exposure at the time of creating the pledge.

But shares of Thyrocare have faced a lot of heat since then. A further reduction will bring the pledge value under a lot of pressure. So investors should be vary of that.

At the time of creating the pledge (September 2021), shares of Thyrocare were trading at Rs 1,258. At present, shares are quoted at around 870.

Shares of diagnostic companies have been under pressure of late as they were trading at much higher valuations than their historical valuation bands.

Any disappointment in their operating performance would have resulted in a sharp crash and that's exactly what has happened.

With this correction, Thyrocare's current valuations are below its 3 years average PE.

The opportunity is huge in the diagnostics space and there's headroom for players to grow. No wonder Tata (with the acquisition of 1mg) and Reliance (through Netmeds) want a piece of the pie.

#3 Jagran Prakashan

You must have heard of or read popular newspapers like Dainik Jagran, Mid Day, and Nai Dunia. All these are flagship brands of Jagran Prakashan.

Jagran Prakashan is promoted by the PC Gupta family. The group publishes eight newspapers and a magazine, from 37 printing facilities across 13 states in 5 languages.

As of December 2021, promoters of the company hold 69.4% stake with 99.99% of it being pledged by them. Promoters initially pledged all their shares in the June 2020 quarter. The percentage has stayed constant since then.

The company opted to raise funds during Covid and went with debentures. For this, they pledged their shares towards it. The money was raised as an emergency buffer as media sector was struggling during the initial covid days.

Since the fund raise, Jagran has performed well. Revenues and profits both have been on an upward trajectory for the past quarters.

With a healthy market position and established leadership in the segment, Jagran Prakashan, with a 100% promoter pledging, does not raise any red flag. At least for now.

#4 Bajaj Hindusthan Sugar

Last on our list we have a sugar company - Bajaj Hindusthan Sugar.

The company is one of the largest sugar manufacturing companies in India. It's also the largest industrial alcohol manufacturer in India. It has 14 sugar factories with an aggregate capacity of 1.36 lakh tonne of sugarcane crushed per day.

If there was one company that has maintained it's 100% promoter pledging status, it has got to be Bajaj Hindusthan Sugar.

Since 2015, promoters' entire stake has been pledged with SBICap Trustee company.

When promoters pledged their entire 46.13% stake in the company to SBICap Trustee as part of the debt restructuring plan, Bajaj Hindusthan was the largest sugar firm.

At that time, the company went for debt restructuring package worth around Rs 100 bn.

Ever since the pledging, shares of the company have had no luck. Instead, they are trading near the same levels they were trading back in 2015.

The company continues to report delays of debt repayment, high cane arrears and large debt repayments.

Its financials also don't provide any cushion. Bajaj Hindusthan has an on and off track record of quarterly losses.

One more important point is the company has invested a substantial amount in its group companies by way of investments and loans & advances. The same amount isn't recovered which can explain its poor liquidity situation.

With sugar being a cyclical sector and Bajaj Hindusthan not having such a good track record, investors who stayed away from it must be having a good laugh by now.

To conclude...

It's always better to check promoter pledging before making investment decisions as over leveraged firms with high percentage of pledged shares could very well turn out to be value traps.

So if you are investing in a company with high promoter pledging, check the debt levels. Also keep a track of how the company has performed on the financials front since the time it pledged shares.

Keep an eye out for such data points especially for companies with questionable managements.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.