Rising Promoter Pledging Trends: Top 5 Stocks to Watch Out

Promoter pledging is a legal practice where promoters of a company use their shares as collateral for loans.

However, a consistent rise in promoter pledging can be a red flag for investors.

If the company's share price falls, the level of pledging can increase as the lenders demand more collateral. This can happen if margin calls are triggered.

If the company's promoter can't honour these, it may lead to an open market sale of the pledged shares, eroding the value of shares.

While high promoter pledging can be a warning sign, it should not be the sole determinant in investment decisions.

Recent data shows an increasing trend of share pledging among listed companies.

Let's look at the top companies where promoters have pledged their shares recently.

#1 Shilpa Medicare

Shilpa Medicare, a prominent player in the pharma industry, has seen a consistent rise in promoter pledging.

The company, incorporated in 1987, specialises in the production of active pharmaceutical ingredients (APIs) and formulations.

Promoters of Shilpa Medicare have pledged a significant 90.41% of their holdings. This pledge has seen a sharp increase from 12.90% in the previous quarter.

Shilpa Medicare Promoter Pledging

Quarter Ending	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22	Mar-23	Jun-23	Sep-23
Pledged Promoter Holding (%)	0.81	0.81	0.81	0.81	1.38	12.9	12.9	90.41

Data Source: Equitymaster

The company's financial performance has been mixed. In the past five years, the company's revenue has grown from Rs 7 bn to Rs 11 bn while profit has declined.

It even reported a loss in FY23.

Financial Snapshot

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	7,334	9,079	9,011	11,455	10,501
Sales growth	-7%	24%	-1%	27%	-8%
Operating Profit	1,696	2,367	2,118	2,181	1,197
OPM	23%	26%	24%	19%	11%
Net Profit	1,123	1,562	1,478	607	-325
NPM	15%	17%	16%	5%	-3%
Debt to Equity (x)	0.2	0.3	0.6	0.4	0.5
ROE (%)	9.6	12.2	10.4	3.7	-1.7
ROCE (%)	10.5	12.4	10.7	5.9	0.8

Data Source: Equitymaster

Despite these challenges, Shilpa Medicare holds promise. It has a strong presence in the industry, backed by a robust product portfolio.

In terms of government initiatives, Shilpa Medicare has received approval from the CDSCO (DCGi) for its Tranexamic Acid Spray (Haemostatic Spray).The company has also received a GMP certificate from the UK MHRA.

In its latest concall, the management said that for the next two years, they have a series of complex product launches in addition to the existing products in new countries. This will help improving the company's cash flows.

It also expects two product launches per quarter from the CDMO business.

While Shilpa Medicare presents potential growth opportunities, the consistent rise in promoter pledging and mixed financial performance warrant careful consideration.

Foreign investors (FIIs) also reduced their stake in the most recent quarter to 8.6% from 10.3% earlier.

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

#2 TTK Prestige

Next on this list we have TTK Prestige, a leading player in the consumer durables industry.

The company, established in 1928, is renowned for its wide range of kitchen appliances.

Promoters of TTK Prestige have pledged 5.95% of their holdings as of September 2023. This is up from 0% in June 2023. The reasons for this increase in promoter pledging are not publicly disclosed, which could be a potential red flag for some investors.

The company's financial performance has been steady.

In recent quarters, the company's kitchen appliances segment has seen a reduced share of wallet and tepid demand due to spending on alternate avenues like automobile, travel, entertainment, and tourism.

The company had also accumulated high-cost inventory in the earlier quarters. This resulted in contraction in gross margins.

Despite all this, TTK has maintained its leadership position in key categories like pressure cookers, cookware, value added gas stoves, induction cook top, kettles, etc and is steadily improving its market share in the mixer grinder segment.

The company has strong growth prospects. As the Indian middle class continues to grow and incomes rise, there is increasing demand for kitchen appliances.

TTK Prestige, the market leader is well-positioned to benefit from this trend, with a diverse product portfolio that includes pressure cookers, cookware, gas stoves, and small kitchen appliances.

Apart from that, the upsurge in real estate development and sales, nuclear family living, changes in consumer behaviour, and acceptance to pay a premium for better products and services, are some more reasons in favour of TTK.

The company's strong market presence and zero debt are positive indicators, but the lower ROE and lack of transparency in promoter pledging could be potential areas of concern.

Financial Snapshot of TTK Prestige

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	21,069	20,730	21,942	27,225	27,771
Sales growth	13%	-2%	6%	24%	2%
Operating Profit	3,213	2,908	3,568	4,616	4,063
OPM	15%	14%	16%	17%	15%
Net Profit	1,924	1,862	2,368	3,048	2,542
NPM	9%	9%	11%	11%	9%
Debt to Equity (x)	0.1	0.0	0.0	0.0	0.0
ROE (%)	17.6	15.0	17.3	18.9	13.9
ROCE (%)	24.6	18.6	22.6	25.2	18.9

Data Source: Equitymaster

#3 Websol Energy System

Websol Energy System, a key player in the solar energy sector, has seen a consistent rise in promoter pledging.

The company was established in 1994 and specialises in the manufacturing of photovoltaic monocrystalline solar cells.

Promoters of Websol Energy have pledged a significant 89.3% of their holdings in the September 2023 quarter. This is a sharp increase from 5.8% in the previous quarter.

The reasons for this increase in promoter pledging are not publicly disclosed, which could be a potential red flag for investors.

On top of this, FIIs have reduced their stake in the company to below 1% from 4% in the June 2023 quarter.

As far as the company's financials go, Websol's balance sheet is still shaky with inconsistent sales and losses reported over the years.

The company posted a loss of Rs 240 million (m) in FY23 as net sales sharply reduced to Rs 170 m from Rs 2.1 billion (bn) in FY22.

Websol has consistently reduced debt and its current debt to equity ratio stands at 0.1x as against 0.6x five years ago.

Financial Snapshot of Websol

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	686	1,955	1,536	2,132	172
Sales growth	-63%	185%	-21%	39%	-92%
Operating Profit	-73	137	381	310	-98
OPM	-11%	7%	25%	15%	-57%
Net Profit	1	-194	199	42	-79
NPM	0%	-10%	13%	2%	-46%
Debt to Equity (x)	0.6	0.6	0.2	0.2	0.1
ROE (%)	-25.8	3.3	33.1	5.3	-12.4
ROCE (%)	-11.9	-4.5	38.2	7.8	-12.4

Data Source: Equitymaster

The company has a strong presence in the solar energy industry and is backed by a robust product portfolio.

Websol has invested in cutting-edge developments to manufacture world-class photovoltaic cells and solar modules at its state-of-the-art facility in Falta, SEZ. The facility comprises a production capacity of 250 MW cells and 250 MW modules.

It has also invested in an R&D (research and development) team focused on maximising equipment utilisation and quality standards with the objective of product customisation.

While Websol Energy presents potential growth opportunities, the consistent rise in promoter pledging and the negative P/E ratio warrant careful consideration.

The company's strong market presence and low debt level are positive indicators, but the lack of transparency in promoter pledging could be a potential area of concern.

#4 Apollo Micro Systems Limited

Apollo Micro Systems specialises in the design, development and manufacturing of electronics and electro-mechanical systems.

Promoters of Apollo Micro Systems have pledged a significant 28.2% of their holdings. This is a sharp increase from 0.9% in the previous quarter.

The reasons for this increase in promoter pledging are not publicly disclosed, which could be a potential red flag for investors.

The company has reported consistent sales and profits for the past couple of years. It also has a lot of tailwinds working in its favour at the moment.

Financial Snapshot of Apollo Micro

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	2,629.75	2,459	2,031	2,432	2,975
Sales growth	19%	-6%	-17%	20%	22%
Operating Profit	521	503	392	463	649
OPM	20%	20%	19%	19%	22%
Net Profit	291	140	103	146	188
NPM	11%	6%	5%	6%	6%
Debt to Equity (x)	0.4	0.3	0.4	0.4	0.4
ROE (%)	10.8	4.7	3.4	4.7	5.7
ROCE (%)	12.5	10.6	7.6	8.7	10.7

Data Source: Ace Equity

Last month, the company announced an ambitious capital expenditure plan of Rs 1.5 bn to establish a defence equipment manufacturing facility at Hardware Park in Hyderabad.

The proposed new units will expand the existing infrastructure by an impressive 300,000 square feet and will serve as a home for a defence electronics and electro-mechanical manufacturing facility, capable of handling bulk production.

Apollo Micro Systems also announced significant agreements with the Defense Research and Development Organisation (DRDO), marking a significant milestone in their ongoing partnership.

The company is actively engaged in discussions with various international companies interested in producing their goods under the 'Make in India' initiative, and this state-of-the-art facility will be utilized to fulfil their manufacturing needs.

While Apollo Micro Systems presents potential growth opportunities, the consistent rise in promoter pledging and the high P/E ratio warrant careful consideration.

The company's strong market presence and low debt level are positive indicators, but the lower ROE and lack of transparency in promoter pledging could be potential areas of concern.

#5 Polyplex Corporation

Last on the list is Polyplex Corporation, a leading player in the plastic products industry. The company specialises in the manufacturing of PET films.

Promoters of Polyplex Corporation have pledged all their shares in the most recent September 2023 quarter. This pledge is a sharp increase from 0% in the previous quarter.

This pledging out of the blue has raised some concerns among investors.

Earlier this year, the promoters of Polyplex Corporation agreed to sell a 24.2% stake in the firm to Dubai-based AGP Holdco.

The deal was valued at Rs 13.8 bn at that time and includes a binding term sheet as well as provisions for put and call options. This would allow AGP Holdco to increase its stake in the future.

However, it was announced last month that the deal value will be revised downward to Rs 11.9 bn. All this has created a degree of uncertainty in the market about the company's future.

The company's EPS is also declining consistently. If you were to look at the company's performance over last eight quarters, EPS has been falling since September 2022.

However, Polyplex does have a strong presence in the plastic products industry and is backed by a robust product portfolio.

The company has consistently generated strong operating cash flow over the past decade, thanks to its high-capacity utilisation and its presence in the less volatile BOPET segment.

Financial Snapshot of Polyplex

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	45,699	44,871	49,183	66,244	76,523
Sales growth	28%	-2%	10%	35%	16%
Operating Profit	8,949	8,421	12,759	14,359	10,424
OPM	20%	19%	26%	22%	14%
Net Profit	3,300	2,820	5,118	5,688	3,484
NPM	7%	6%	10%	9%	5%
Debt to Equity (x)	0.3	0.3	0.2	0.3	0.2
ROE (%)	22.0	17.0	28.4	30.3	18.1
ROCE (%)	19.7	17.9	26.5	29.1	17.5

Data Source: Equitymaster

While Polyplex Corporation presents potential growth opportunities, the recent rise in promoter pledging warrants careful consideration by investors.

The company is expected to showcase improved financial performance due to stabilising input costs and the re-negotiation of old contracts. The company is also benefiting from a rise in demand, which is creating favorable market conditions.

Snapshot of Companies with High Promoter Pledging

Here's a snapshot of companies that have seen promoter pledging for the past four quarters.

Since promoter activity interests you, check out other screens on Equitymaster's powerful stock screener.

• Stocks with High Promoter Pledge in India
• Promoters Decreasing Stake for 4 Consecutive Quarters
• Promoters Increasing Stake for 4 Consecutive Quarters

Investment Takeaway

In conclusion, tracking promoter activities, particularly share pledging, is crucial in stock analysis.

While share pledging is a legal and common practice for securing funds, a consistent rise can signal potential financial distress.

It's important to understand the context. If funds raised through pledging are used for income generation, it's less concerning than if used for personal purposes.

A significant drop in share price can trigger margin calls, potentially leading to an open market sale of pledged shares, further eroding share value.

Therefore, alongside financial health, tracking promoter activities is vital when shortlisting stocks for your portfolio.

Stay informed, stay cautious, and 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...