5 Promoters Who Sold Their Holding Before the Stock Market Selloff

The Indian stock markets have been tumbling. As economic realities of high inflation and slowing growth set in, the BSE Sensex has dropped more than 10% since its January 2022 peak.

Most stocks have fallen, with some even nearing their 52-week lows. While this is usually a good time to buy fundamentally strong stocks trading at low valuations, some 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, they are the ultimate insiders, the flag bearers of the company who decide everything.

They know the true picture of the existing business, they're well aware of the corporate governance practices, and they understand the business prospects and headwinds.

So, if they choose to sell even a small stake in the business, your antenna must go up.

Promoters selling their stake in the business can usually mean many things. Maybe all is not well with the underlying business, or the stock is trading at a large premium to its fair value, or the business profitability and growth have peaked.

Your job is to find the reason and its impact over the long term.

So, with this in mind, we outline and study five stocks in which promoter's holdings have fallen in the last few quarters.

1. Restaurants Brands Asia (Burger King)

First on our list is Restaurants Brands Asia (Burger King). The promoter holding in the stock fell from 52.5% as of December 2021 to 40.9% as of March 2022.

The promoters sold 100 m of their shares to institutional investors via a qualified institutional placement (QIP), resulting in a drop in shareholding.

Interestingly, instead of issuing fresh shares, they chose to sell a part of their stake for the QIP. Now, this can be a cause for concern considering the promoters have reduced their stake within a year of listing the company (December 2020).

Restaurants Brands Asia (Burger King) has been growing aggressively. One of the fastest-growing international quick-service restaurant (QSR) chains in India, Restaurants Brands Asia (Burger King) offers fast food, including burgers, fries, rice etc.

But the robust growth comes on the back of losses. Its expenses have increased faster than the revenues, resulting in losses.

Whether the company will generate a profit, remains to be seen. On a four-year CAGR basis, the revenue grew by 21%.

Since its listing, the stock has tumbled down to Rs 97, a 38% fall. Trading at a Price to Book value (P/BV) of 8x, it is at a high premium to its industry P/BV of 4.7x.

To know more, check out Restaurant Brands financial factsheet and its latest quarterly results.

2. Coforge

Next on our list is Coforge.

The promoters, Hulst BV, have consistently offloaded their stake in the company, a great cause for concern. From 63% as of March 2021 to 40% as of December 2022, the promoters have sold a whopping 20% stake in the business.

Moreover, the promoter offloading has happened at a time the company was trading at peak valuations of around 50x P/E, an exorbitant premium to its 5-Yr and 10-Yr median PE of 23.1x and 12.5x respectively.

This usually indicates that the promoters might think the stock is overvalued and the business prospects don't justify the current valuations, propelling them to profit from a stake sale.

The business has been growing well, registering revenue and net profits 5-Yr CAGR of 11.5% and 10.5% respectively.

The returns have been equally strong. The business generated a 5-Yr average Return on Equity (ROE) of 19.8%. With zero debt on its book and healthy cashflows, the company has rewarded its shareholders consistently. The 5-year average dividend yield is 1.6%.

Despite the stake sale, the stock price of Coforge hasn't fallen much. Trading at 31x P/E the stock price is still at a premium to its 5-Yr and 10Yr median PE and the industry P/E of 26.5x.

To know more, check out Coforge's financial factsheet and its latest quarterly results.

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 total promoter holding fell to 60.6% as of March 2022 from 62.1% as of December 2021.

Considering this could be a one-time event, it does not raise a big red flag. However, if the promoters continue to offload their stake in the future, it might be a cause for concern.

Geojit was founded by Mr. C J George in 1987 and the major stakeholders of the company include Mr. C. J. George and Kerala State Industrial Development Corporation, and ace investor Rakesh Jhunjhunwala, who has a 7.5% stake in the company.

The financial services company offers a wide array of products and services such as distribution of mutual funds & insurance, equity and derivatives, commodity, (portfolio management services) PMS and financial planning.

The business has been performing well. On a CAGR basis for five years, it has generated revenue and net profit growth of 11% and 22% respectively. From a return perspective, the five-year average return on equity (ROE) has been 12.9%.

The company has been very generous to its investor. Their average dividend yield comes to around 4.5% over the past five years.

The stock is trading at 1.7x, a discount to its 5-Yr median P/BV of 2.3x and the industry average of 2.3x.

To know more, check out Geojit's financial factsheet and its latest quarterly results.

4. Cipla

Fourth on our list is Cipla, one of the country's largest drugmakers.

The stock's promoters Dr Y K Hamied and MK Hamied recently sold a 2.5% stake in the company for "personal purposes including philanthropy". This has reduced their holding in the business from 36.1% in December 2021 to 33.6% in March 2022.

The stake amounts to a whopping Rs 18 bn. The company clarified further, stating that the ageing promoters (around 80 years old) wish to ''use the funds generated from this sale for personal purposes including philanthropy.''

This stake sale is probably not very alarming. Considering this is a one-time event and the company's performance has been strong over the past two decades, the promoters have no reason to exit the company.

Cipla's revenue and profits have grown at a 5-Yr CAGR of 15.4% and 11.5% respectively, while the 5-Yr ROE average stands at 10.7%.

Despite piling up cash on its books, the company has not been very generous to its shareholders. The dividend yield has been in the range of 0.6%.

The company is trading at a P/E of 29.6x, a minor discount to its 5-year historical median P/E of 32.1x and industry P/E of 33.1x.

To know more, check out Cipla's latest shareholding pattern.

5. HDFC Life

Last on our list is HDFC Life. India's leading life insurance companies, HDFC Life is a joint venture between HDFC and Standard Life Aberdeen.

The shareholding pattern of HDFC Life indicates that the promoter stake has fallen from 53% to 51%. While the promoter's stake has dipped by 2%, the promoters have not sold any percent of their stake.

The company has simply issued more shares to the public, diluting the promoters stake. This has been to raise money for acquiring Exide India's insurance business.

Therefore, this dip in the promoter stake does not warrant a red flag. Besides, the business has been on a strong growth trajectory so there is no reason for the promoters to consider exiting it.

The net profits have grown well at a 5-Yr CAGR of 10.5%. The 5-Yr average ROE stands at an admirable 22.9%. But the stock's 5-year average dividend yield is 0.5%, in line with the industry average of 0.6%.

Currently, the company is trading at a P/BV of 8x, which is a deep discount to its 5-Yr median P/BV of 16x but at a large premium to the industry average of 2.2x.

To know more, check out HDFC Life's financial factsheet and its latest quarterly results.

In conclusion...

There are several instances where promoters have sold their stakes, and the stock has gone on to perform well.

Hence, as alarming as promoters offloading stake or increasing stake might be, you must look into the primary reasons behind the sale.

Check to see if the reasons can cause any long-term damage or if it is just a solution to a temporary financing problem. Study and analyse the company's fundamentals so you can be sure that the reasons you bought it originally still hold.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...