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High promoter-pledged shares played party-pooper for a lot of companies on Dalal Street this year. Almost three fourths of BSE 500 companies with a high proportion of pledged promoter holdings — more than 60 per cent at the end of the September quarter — have underperformed the market this year. The market hasn’t punished all such companies but, say market players, the comfort levels are low when dealing in such shares.
ABG Shipyard, Jaiprakash Power and Pipavav Defence all have promoter-pledged holdings of upwards of 90 per cent. They’ve seen their share price erode by a little more than 20 per cent this year, while the benchmark indices have rallied nearly 35 per cent.
The average return this year for the 30 companies from the BSE 500 which had pledged-promoter holding of more than 60 per cent has been less than eight per cent.
“These companies (the underperforming ones) are fundamentally weak, where there might be problems of cash flows. Promoters of such companies might be compelled to pledge their stake to get more loans,” said Dhananjay Sinha, co-head (institutional research), Emkay Global Financial Services.
Typically, promoters resort to pledging of their shares with banks or financial institutions to get loans for their business. Such entities have to either cough up more shares or margin as additional security, if the stock price starts to decline. An increase in promoter pledges is seen as an unhealthy sign of a company’s financials, analysts said.
Interestingly, companies whose share prices has suffered the most have seen a significant rise in the amount of promoter-pledged shares.
Bhushan Steel, for instance, has seen the percentage of promoter-pledged shares more than double to 70.5 per cent since the year’s beginning, while its stock price has fallen about 80 per cent. Similarly, pledged shares at Tilaknagar Industries have climbed from 30 per cent to 67 per cent, while its stock price has declined 51 per cent.
“The markets probably don’t want to give valuations to a company where the promoter pledges have gone up because there might be concerns on cash flow,” said Mayuresh Joshi, vice-president and head (institutional sales), Angel Broking.
Most of these companies with high promoter pledges and falling stock prices are from the infrastructure sector.
However, a few companies — Essar Ports, Alok Industries and Suzlon are examples —have managed to clock good returns despite high promoter pledge. Analysts said a high n measure in this regard doesn’t always imply that a promoter or a company is under financial stress.
“We cannot say that the company’s stock price is being punished merely because of a higher proportion of pledged shares. We need to see what is happening on the business side of these companies, the quantum of debt on their balance sheets and what the order book looks like,” said Vinay Khattar, associate director and head of research, Edelweiss.
According a recent report from Kotak Institutional Equities, the total value of pledged shares by promoters of BSE 500 companies at the end of the September quarter was Rs 1.54 lakh crore, about 1.7 per cent of the market capitalisation. A total of 144 companies in the BSE 500 universe had their shareholding pledged.
The percentage of promoter holdings which were pledged had fallen to 11.7 per cent in the September quarter from 11.9 per cent in the June quarter, says the Kotak report. However, compared to December 2013, the percentage of pledged promoter holding had increased by 100 basis points.
