Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
How much more will the promoters dilute? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

How much more will the promoters dilute?

May 28, 2010

Traditionally promoter's stake has always been viewed as an additional measure of confidence in the company by investors. Although higher promoter stake does not mean that the company is better (higher stake lowers free float thereby increasing volatility) but it signifies the value and confidence the promoters place on their business.

But it seems that the construction industry is an exception to this anomaly. Here we try and decode the juggernaut of lower promoter stake in the construction industry.

Construction companies typically bid for various projects that require certain financial and technical credentials. Their bid capacity is constrained by the net worth requirements. So, in case the company plans to bid for high value projects, it needs to increase its net worth.

And the best way to do that is to dilute!

Although we are not against the dilution by promoters considering the nature of the industry - What concerns us is the incremental RoE they generate on the fresh capital raised. In the greed to increase their bid capacity and subsequently pre-qualify for projects, many of the industry players have gone in for dilution. This increases their order book and top-line and the street reacts positively to it.

We believe what the street essentially misses and ideally should look forward to - is the incremental RoE that the company can generate from bagging that additional project. The business is not all about top line.

Following is the list of promoter's stake over the last few years of select construction companies.

Name of the companiesFY04FY05FY06FY07FY08FY09FY10
IVRCL Infrastructures21.9%13.8%12.9%10.0%9.6%9.7%9.7%
Simplex Infrastructures54.7%54.7%46.5%51.4%49.4%54.1%54.7%
Source: BSE

It is clearly evident from the above table that majority of the companies have under gone dilution in the last few years to increase their bid capacity.

Simplex and HCC have relatively higher promoter stakes as compared to NCC and IVRCL. However, it should be noted that both HCC and Simplex are more leveraged. Thus, the funding for the projects comes from the debt rather equity.

Does this mean the promoters of HCC and Simplex value their equity dearly? - Perhaps so!

Now that the reason for lower promoter stake is clear, the subsequent question that arises is what happens next once the promoters reach the threshold level of dilution. How will they be able to dilute after that?

It seems the promoters have found an answer to this question as well.

Dilution typically happens in order to raise equity for BOT projects. And these BOT projects are managed by an SPV specifically formed to handle the BOT assets.

So what the promoters do is that they carve out the SPV into an independent entity (and probably get it listed) separating the BOT assets from their own balance sheet. As the SPV is now a separate entity managing the BOT assets, further fund raising (dilution) exercise happens on the balance sheet of the independent entity restricting dilution in the parents books. Smart exercise indeed!

We believe that the construction industry has got the potential to create wealth for the shareholders provided the management develops internal benchmark for profitability or IRRs for future project selection.

Only time can tell whether this is possible or not.

Equitymaster requests your view! Post a comment on "How much more will the promoters dilute?". Click here!


More Views on News

IRCON International IPO: Is This PSU Worth Betting On? (IPO)

Sep 17, 2018

Should you subscribe to the IPO of IRCON International Ltd?

Capacit'e Infraprojects Ltd. (IPO)

Sep 12, 2017

Should you subscribe to the IPO of Capacit'e Infraprojects Ltd?

Bharat Road Network Ltd. (IPO)

Sep 5, 2017

Should you subscribe to the IPO of Bharat Road Network Ltd?

More Views on News

Most Popular

Stocks that Could Be Out of Reach Post Elections(The 5 Minute Wrapup)

Apr 9, 2019

It's a matter of time before the stocks catch the fancy of the markets and big investors.

3 Indian Stocks with Amazon-Like Potential(Profit Hunter)

Apr 10, 2019

We have identified 3 stocks with huge wealth building potential which meet our 'Click of a Button' criteria.

This Company is Making a Big Comeback and You Can Now Profit from Its Example(The 5 Minute Wrapup)

Apr 10, 2019

How Dell got its mojo back.

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Apr 18, 2019 (Close)