Tepid markets fail to lift split stocks

Of the 11 companies that did splits during FY16, seven underperformed the market

With overall market conditions remaining subdued for most of 2015-16 (FY16), stock splits failed to prop up sentiment. Of the 11 companies that did a stock split during FY16, seven stocks, or two-thirds, underperformed the market.

A stock split is an issue of new shares in a company to existing shareholders in proportion to their current holdings. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. After a split, the stock price will be reduced since the number of shares has increased. But the market capitalisation remains constant.

Aegis Logistics (up 36 per cent), Welspun India (up five per cent), Shilpa Medicare and Bata India (up one per cent each) outperformed as compared to negative returns (minus 0.17 per cent) recorded by the benchmark index after their split. Sequent Scientific (up 4.6 per cent) recorded positive returns, but rose less than the benchmark index after stock split.

A run-up in the market price of stocks of these companies in the past year ahead of stock splits had led promoters to opt for sub-division of shares, analysts say.

A stock split is usually done by companies that have seen their share price increase to levels that are either too high, or beyond price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors. However, there is no impact on valuation metrics such as price to equity or price-to-book value ratios. Future returns do not change because a stock has been split.

  Cadila Healthcare, Natco Pharma, Sequent Scientific, and Shilpa Medicare had sub-divided the face value of their shares. J Kumar Infraprojects, Titagarh Wagons, and Avanti Feeds opted for stock splits, and have slipped 22 per cent after the events.

Natco Pharma and Shilpa Medicare had surged 70-100 per cent before the split, while Sequent Scientific, and Cadila Healthcare gained 65 and 55 per cent, respectively.

"Pharma stocks are an exception, because the past 52 weeks have been peculiar in the history of Indian pharmaceutical companies. We have seen numerous alerts and warnings from foreign regulators to them. So these are an exception to this overall stock-split analysis," said G Chokkalingam, managing director, Equinomics Research & Advisory.

"During the March quarter results announcements, we would watch for management commentaries on the various pharma units' status," said Piyush Nahar, analyst with Jefferies, in a report authored with Poornaa Venkatesan.