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If promoter buying is cue for you, these 46 midcaps, smallcaps saw a lot of it in 2019

Promoters’ activity analysis can be one of the methods to judge where a business headed.

, ETMarkets.com|
Last Updated: Jan 22, 2020, 11.11 AM IST
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Analysts say promoters increasing stake typically sends out a message that they see value in the company at that level or there may be some positive development in store.
When 80 per cent of stocks on Dalal Street were facing severe selling pressure in Calendar 2019, promoters of at least 46 midcap and smallcap firms were busy in gradually raising their ownership.

Promoters’ activity analysis can be one of the methods to judge where a business headed. A rise in promoter holding indicates that company owners are confident of their company’s growth prospects, as at any point they are the best judge of the strengths and weaknesses of the business.

Data available with Ace Equity suggests promoters from across sectors including auto ancillary, batteries, casting, chemicals, consumer food, real estate, engineering, electrode, finance, information technology, hotels, pharmaceuticals, pesticides, sugar and textiles increased holdings every quarter in 2019.

Some of the second-rung stocks in which promoters increased their holdings last year included Balaji Amines, Radhe Developers, Steel Strips Wheels, Bright Brothers, Libord Finance, HBL Power Systems, Kanpur Plastipack and Sukhjit Starch. These stocks have also been seeing a lot of action of late and have managed to deliver positive returns ranging from 3 per cent to 32 per cent to investors so far this year.

Table 1

Analysts say promoters increasing stake typically sends out a message that they see value in the company at that level or there may be some positive development in store. Sometimes, promoters use such depressed markets to increase their holdings in order to prevent any hostile takeover, again a positive indicator.

“A promoter gradually increasing stake in the company is definitely a positive sign for investors. This implies his conviction, commitment on and future growth prospects of the company. However, buying a stock just because the promoters are buying may not be the right thing to do. One must also do some research on the company and its business model. Promoter buying should be seen as a confidence-booster signal,” says Narendra Solanki, Head of Fundamental Research for Investment Services at Anand Rathi Shares & Stock Brokers.

Some other stocks where promoter holding went up last year have actually seen further value erosion in recent weeks. Stocks like Tainwala Chemicals (down 55 per cent), DCM Shriram Industries (down 52 per cent), Plastiblends India (down 49 per cent), Avonmore Capital (down 49 per cent), Sybly Industries (down 47 per cent), Orient Bell (down 45 per cent) and Alembic (down 44 per cent) fall in this bracket.

Table 2

A couple of these stocks also happen to be favourites of well-known investors on Dalal Street. For instance, Anil Kumar Goel held over 1 per cent stake each in Panama Petrochem, Sarla Performance Fibres and Ador Fontech as on December 31, 2020. Vijay Kedia-owned Kedia Securities had a stake in Astec Lifesciences, while many others on the list were owned by various domestic money managers.

“Promoters picking up stake could mean they are bullish on the long-term prospects of the business. However, nowadays it has also become a signalling mechanism to buy a small stake and prop up the price in the near term,” says Prabhakar Kudva, Director at Samvitti Capital.

“Investors should only pay heed if or not the quantum of buying is significant enough compared with their existing stake. Even then it’s important to understand that this is just a starting point to start studying the company,” he said.

Abhishek Basumallick, Chief Equity Advisor at Intelsense Capital, said promoter buying cannot be the sole criterion to buy into a stock. “You will always need to look at other parameters. Promoter can buy or sell due to many reasons, some of which are personal in nature and has nothing to do with the business fundamentals,” he said.

(Disclaimer: Stocks mentioned in the article are for information purposes only. Consult your financial adviser before taking any buy or sell decision)

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