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Value in the eyes of promoters - Views on News from Equitymaster
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Value in the eyes of promoters
Sep 16, 2008

In one of our previous articles, we tried to find out what the FIIs have done to their Nifty holdings over the past one-year. In this article, let us see what the promoters of the companies that fall in the BSE 100 index have done to their holdings over the past one-year? As seen from the chart below, around 42% of the companies have seen their promoter shareholding come down in the past one year while 23% of the companies have witnessed an increase. The remaining 31% of the companies have seen their shareholding remain unchanged at the end of 1QFY09 as compared to 1QFY08. Let us have a look at each of the segments and the companies therein and try and decode the patterns if any.

Stake diluters: As mentioned above, 42% of the companies have witnessed a reduction in promoter shareholding in the period under consideration with the top honours going to the companies mainly from the infrastructure space. There could be two reasons behind such a move. Either the promoters have cashed out or they have diluted their stake for capital raising purposes. Going by the current macroeconomic environment, it looks like the latter is more likely to be the case. It should be noted that infrastructure companies by and large generate low returns on their capital employed and hence, when they are on a high growth path such as the one taking place in India currently on account of the infrastructure boom, there arises a need to raise capital. Hence, the reduced promoter shareholding of the sector companies is most likely a result of satiating increasing capital needs rather than cashing out.

Stake enhancers: Although 23% of the companies in the index under consideration have managed to increase promoter shareholding, the increases have been marginal in most of the cases. However, it is worth mentioning that barring Reliance Petroleum, all the companies that were part of the unified Reliance group and are now being run separately by the two managements have witnessed an increase in promoter shareholding. Looks like two of the largest wealth creating companies in India’s corporate history in recent times still appear undervalued to their promoters.

At 31%, the number of companies that have seen their promoter shareholding remain intact is also significant. Thus, the study clearly points to the fact that while the stock markets may have witnessed a significant correction, most of the promoters seem to have faith in the growth prospects of their companies and are also willing to put their money where their mouth is. This could be either by diluting stake and pumping in more money into the business so that even more wealth could be generated in the future or by taking advantage of the market vagaries to enlarge their portion of the company value pie.

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