Top 6 Stocks with Consistent Rise in Promoter Pledging

An individual can take a loan from a bank using any asset such as a house, property, physical gold, fixed deposits, or even shares.

Similarly, even a company can take a loan against any of its assets, including shares.

When promoters take a loan against the shares they hold, it's called pledging. The shares are just used as collateral for the loan, and the right to sell them lies with the creditor until the loan is paid back.

Share pledging is legal and is practised widely across the world to fund a business, repay existing loans, for working capital requirements, and so on.

However, a high level of promoter pledging can raise a red flag.

This is because when a large percentage of shares are pledged, and the promoters fail to repay, the lender has the right to sell the shares in the open market.

This can lead to fall in the value of the shares held by the shareholders making the company a risky investment.

Keeping this in mind, we have shortlisted six stocks that have consistently pledged shares in the past few quarters.

These stocks are filtered using Equitymaster's stock screener.

#1 Mangalore Chemicals & Fertilizers

First on the list is Mangalore Chemicals.

Incorporated in 1966, the company is a part of the UB Group and is engaged in the business of manufacturing ammonia, urea, di-ammonium phosphate, and ammonium bicarbonate.

It markets its products under the brand name 'Mangala'.

The company's promoters have pledged close to 75.8% of the shares they hold within the company (which is 45.9% of the total equity) as of 30 June 2023.

They first pledged shares in 2021 for personal use and to fund the company's energy improvement project. They pledged close to 54% of shares in August 2021.

Within two years, the total pledged shares increased to 75.8% of the total promoter holding. The reason stated by the company is to repay the existing loans and for general corporate purposes.

Although Mangalore Chemicals has released some pledges within a few months of creating them, the company is continuously creating new pledges to fund its business. This raises a red flag.

To add to this, the company's revenue has grown at a marginal compound annual growth rate (CAGR) of 3.5% in the last five years.

The shares of the company also didn't perform well in the last year and fell around 9%.

Its debt-to-equity ratio also increased drastically and currently stands at 1.7x.

However, the company's prospects are expected to be bolstered by recent government initiatives and market conditions.

The cabinet's fertilizer schemes and the extension of the urea subsidy scheme until March 2025 will help the company cut costs and improve profit margins.

To know more, check out Mangalore Chemicals' financial factsheet and latest quarterly results.

#2 SMC Global Securities

Second on the list is SMC Global Securities.

Established in 1990, the company is diversified financial services firm offering one-stop investment solutions in trading and investments.

It offers broking services across equity, derivatives, currency, and commodity asset classes. It also offers mortgage advisory, investment banking, and financial analytics services to its clients in India and abroad.

SMC Global Securities consistently increased its pledged shares in the last one year. In June 2022, the total pledged shares were 8.6% of the promoter holdings, and it now increased to 25.6% at the end of June 2023.

As per the company's disclosure to the stock exchange, the shares have been pledged to raise money for raising working capital for the company.

The company's performance on the bourses is also disappointing. In the last one year, the shares of the company fell by 9.2%.

SMC Global Securities' delivered a good financial performance in the last five years. The revenue and net profit have grown at a CAGR of 10% in the last five years.

The total promoter holdings also increased from 62.9% to 67.3% in the last one year.

Its debt-to-equity ratio, on the other hand, increased to 0.6x from 0.1x five years ago.

Going forward, the company plans to focus on investing in cutting-edge technology that will help in catering to its clients' needs.

To know more, check out SMC Global Securities' financial factsheet and latest quarterly results.

#3 Aurobindo Pharma

Next on the list is Aurobindo Pharma.

It is the second-largest pharma company in India and the largest generics company in the US.

The company is principally engaged in the manufacturing and marketing of active pharmaceutical ingredients, generic pharmaceuticals, and related services.

The promoters of the company hold 51.8% stake in the company as of June 2023, of which 19.2% of the shares are pledged by them.

As per the disclosure made to the exchange, the pledge has been created for establishing and developing real estate projects under the name 'Aurobindo Realty' and for the personal use of the promoters.

In the last five years, the company's performance has been below average. The revenue has grown at a CAGR of 5%, and the net profit fell at a CAGR of 4%.

Shares of the company have delivered a good performance in recent months. In the last one year, the shares have grown over 50%.

Zero debt and improving financial performance are certainly green flags.

However, it is important to watch out for the pledged shares and promoter holding. Increasing promoter pledges and falling promoter holding can be warning signs.

Going forward, the company's robust pipeline of new products will further boost the company's financial performance and growth trajectory.

To know more, check out Aurobindo Pharma's financial factsheet and latest quarterly results.

#4 Foods & Inns Limited

Fourth on the list is Foods and Inns.

Incorporated in 1967, the company is engaged in the business of processing and marketing fruit pulps, concentrates, dried fruits, vegetable powders, spices, and frozen snacks.

The promoters of the company hold 28.8% shares in the company, of which they have pledged 10.7% of shares (3.08% of the total shares outstanding) as of June 2023.

A year ago, promoters held 45.2% of shares, of which 16.82% of the shares were pledged.

A falling promoter holding with a high pledge indicates a red flag.

The company's debt has increased marginally from 0.1x to 0.2x in the last five years.

The company's shares have zoomed over 170% in the last one year.

One of the reasons behind the rally could be the company receiving approval from the government under the Product Linked Incentive (PLI) scheme.

Although the future prospects look bright, one must look out for the falling promoter holding and increasing promoter pledge.

To know more, check out Foods and Inns' financial factsheet and latest quarterly results.

#5 Chambal Fertilizers and Chemicals

Next on the list is Chambal Fertilizers.

The company is engaged in the business of urea, an important fertilizer and feed supplement used in the agriculture sector.

It is the largest private player in manufacturing urea, with an installed capacity of 3.4 million tonnes per annum (MTPA).

Apart from urea, it also markets other fertilizers, including di-ammonium Phosphate (DAP), muriate of potash (MOP), speciality plant nutrients and crop protection chemicals.

The promoters hold a stake of 60.6% in the company.

Although the promoter holding remained unchanged, the pledged percentage increased from 18.8% in March 2022 to 26.4% in June 2023.

The reason for pledging the shares is to secure a loan taken by the promoters.

Its performance on the bourses was also unsatisfactory. The shares of the company fell by 21.3% in the last one year.

However, the company has delivered a stellar financial performance in the last five years. The revenue and net profit have grown at a CAGR of 22.3% and 11.5%, respectively, on account of healthy volume growth.

Its debt-to-equity ratio also decreased from 1.5x to 0.3x during the same time.

Going forward, the company plans to focus on cutting costs to improve efficiency and launch new products to drive growth in the medium term.

To know more, check out Chambal Fertilizers and Chemicals' financial factsheet and latest quarterly results.

#6 Cian Agro Industries and Infrastructure

Last on the list is Cian Agro Industries and Infrastructure.

The company is engaged in the manufacturing of spices, edible oil, personal care, home care, sanitation, and agro products.

The promoters of the company hold a 72.6% stake in the company, of which 41.3% (30% of the total outstanding shares) is pledged.

In the last two years, the promoter holding decreased by 2%, and the promoter pledge increased by 1.3%.

The reason for the pledge, as disclosed to the stock exchange, is personal reasons.

To add to this, the company's financial performance is also below average. Although the revenue has grown at a CAGR of 13.2% in the last five years, the net profit decreased drastically and touched zero in the financial year 2023.

The company's debt to equity also increased to 1.6x from 0.2x.

It also reported weak quarterly numbers in the June 2023 quarter. The revenue and net profit decreased 53.1% and 25% year-on-year (YoY), respectively.

In the last one year, shares of Cian Agro Industries fell by 28.4%.

To know more, check out Cian Agro Industries and Infrastructure's financial factsheet and latest quarterly results.

Snapshot of promoters pledging consistently in the last 4 quarters on Equitymaster's Indian stock screener

Here's a quick view of the above companies based on their financials.

Investment takeaway

Promoters pledging shares is absolutely normal and legal. This is because companies need money to run a business, and banks need additional security to provide a loan.

If the money raised by pledging shares is being used for generating income, then pledging should be the least of your worries.

However, if the money is used for personal purposes, then you have all the right to be alarmed as the money is not going into the business to generate additional revenue.

This can impact the value of the shares when the promoters fail to pay back the loans and lenders sell the shares in the open market.

So, when you are shortlisting stocks for your portfolio, it is important to track promoter activities along with checking the financial health of the company.

Happy investing!

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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