Stocks of multinational corporations (MNCs) have returned 35-40 per cent, on an average, in the past year. In the last six months, these stocks have given close to 18 per cent, and 30 per cent in the last three months. Why? Individual investors continue to stash stocks of companies that need to lower their promoter stake to adhere to the government’s minimum public shareholding norm.
Stock prices have shot up without support from fundamentals, say market experts. Therefore, there is a likely price bubble (some even compare it to the dotcom bubble) being created, especially in the case of MNC stocks. Industry experts say while there are 15 public sector firms that need to increase their public shareholding, almost 150 private sector companies require to do so. Of these, around 15 are MNCs. Investors are mostly stocking on the shares of these MNCs.
The minimum public shareholding rule announced in 2010 has a deadline of June 2013. According to this guideline, public sector companies are expected to maintain a minimum public shareholding of 10 per cent within three years (from 2010). However, private sector companies need to have a higher public shareholding of 25 per cent. This means promoters of listed entities need to bring their stakes down to below 75 per cent by 2013. Promoters can do so either by diluting their stake or delisting the stock.
Why only MNCs? “Multinational companies prefer delisting over diluting stake,” explains Jagannadham Thunuguntla, head (research) at SMC Global Securities. Also, investors are looking to cash on the delisting gains of these stocks.
The industry expects MNCs to delist and pay any hefty price for it. Says Sanjeev Zarbade, vice-president (private client group research) at Kotak Securities, “Multinationals will not hesitate to buy out Indian shareholders, as it is a small percentage to pay for, for the parent company.” For instance, Alfa Laval initially offered to buy back shares at Rs 2,100 and then raised the price to Rs 4,000. If the possibility of making windfall gains exists, investors will continue to take chances with these stocks.
As a result, investors are buying such stocks without knowing whether or not the fundamentals are supportive. Ideally, investors need to consider the “margin of safety”, at the time of putting money into a stock. That is, each business commands a value and a savvy investor buys a stock below that value (or intrinsic value) to reap the benefits over the long term. “The average valuations of these stocks are over 30 times,” notes Zarbade. “This also indicates investor confidence in these stocks. However, we are expecting a 10-20 per cent correction in these stocks.”
The chances of a correction will only increase if the market regulator gives into industry demand and extends the 2013 deadline. “Suppose the deadline is extended by a year or two. Will these investors wait? Unlikely,” says SMC’s Thunuguntla. These are savvy and well-informed investors, who will mass-sell at the slightest hint of an extension and the price of these stocks will fall, even sharply in some cases, he adds.
This may not a problem for those who invested in these stocks, say, six months to a year earlier. “But, many of those entering now may be playing the unknown, as the delisting time is not known,” says a market expert.
“Further, as most of the shareholders are savvy investors, they may sell now. Then they may buy again at a cheaper price to make gains on delisting, as they are often even aware about the indicative delisting price. The delisting offer cannot go through if these investors do not agree to it.”
Companies cannot grow infinitely and stocks quote at unjustifiable valuations, he adds.
| WORRYING NUMBERS | ||||||||
| Price in Rs | Returns in % |
Promoters
holding | ||||||
| Name | 6-May-11 | Nov 11,’11 | Feb 8,’12 | May 8,’12 | 3-month | 6-month | 1-year | March’12 (%) |
| Astral Poly Technik | 175.65 | 186.90 | 170.00 | 204.05 | 20.03 | 9.18 | 16.17 | 63.81 |
| Blue Dart Express | 1354.25 | 1574.65 | 1690.00 | 1962.25 | 16.11 | 24.61 | 44.90 | 81.03 |
| Elantas Beck | 1204.40 | 1838.60 | 1521.70 | 1960.65 | 28.85 | 6.64 | 62.79 | 88.55 |
| Fresenius Kabi Oncology | 105.90 | 117.40 | 105.65 | 136.65 | 29.34 | 16.40 | 29.04 | 90.00 |
| Gillette India | 1807.40 | 2167.55 | 1992.85 | 2500.00 | 25.45 | 15.34 | 38.32 | 88.76 |
| Honeywell Automation | 2369.65 | 2334.00 | 2318.50 | 2509.00 | 8.22 | 7.50 | 5.88 | 81.24 |
| Novartis | 738.25 | 838.45 | 667.20 | 740.95 | 11.05 | -11.63 | 0.37 | 76.42 |
| Oracle Financial | 1958.30 | 2067.94 | 2177.60 | 2588.80 | 18.88 | 25.19 | 32.20 | 80.36 |
| Styrolution ABS (I) | 487.30 | 613.00 | 591.54 | 703.85 | 18.99 | 14.82 | 44.44 | 87.33 |
| Warren Tea | 360.70 | 410.35 | 362.95 | 426.50 | 17.51 | 3.94 | 18.24 | 83.51 |
| Wendt | 1271.50 | 1684.25 | 1575.15 | 1768.70 | 12.29 | 5.01 | 39.10 | 79.74 |
| Data compiled by BS Research Bureau | ||||||||
Hence, experts advise against buying these stocks at the present price levels. They should preferably buy these stocks once the price falls. If you do want to enter at the current levels, do so if you want to stay invested for the long term.
