Share pledging is a legal and widely practiced method used by promoters to fund their requirements. However, a high level of share pledging raises a big red flag.
As a company’s share price falls, the level of share pledging can go up, led by a fall in the value of pledged shares.
Now, this may trigger margin calls by the banks, which the company will have to honour.
A margin call occurs when the value of the securities falls below a certain level, requiring the account holder to deposit additional cash or securities.
However, if the share price drops significantly the company may be unable to honour its margin calls.
This can lead to an open market sale of the pledged shares, eroding the share price, and affecting investor wealth adversely.
According to the latest share pledge data, corporate India appears to be pledging more shares to raise funds.
A total of 79 BSE-listed companies increased their share pledging during the March 2022 quarter, compared to 74 in the quarter ending December 2022.
We outline five companies from that list where the promoters have increased their level of pledging in the March 2022 quarter.
1. Sundaram Clayton
First on the list is Sundaram Clayton.
The company’s promoter group, TVS Holdings, has pledged 86% of its total holding in Sundaram Clayton to borrow money for the first time. The promoters hold a total of 74.4% of the company.
In an exchange filing, the company stated the money from the pledging will be for the ‘personal use’ of TVS group chairman Venu Srinivasan and his immediate family and for ‘general corporate purposes of the borrower’.
This pledging does not bode well from a corporate governance point of view.
Not only are a large percentage of shares being pledged, but the proceeds are being used for personal reasons, which raises a big red flag.
However, the stock price does not reflect the same sentiment. While the BSE Sensex index has fallen by 11% since the beginning of the year, Sundaram-Clayton is up by 1.6%.
Sundaram Clayton is one of the leading auto components manufacturing and distribution groups in India. It’s a leading supplier of aluminum die castings to the automotive and non-automotive sectors.
The company has enjoyed a stellar run over the last 5 years. It’s revenue and profit has shot up by a 5-year CAGR of 13.4% and 8.5% respectively. The average return on equity (ROE) over the last 5 years stands at 26.5%.
However, as rosy as its performance has been, the company’s net debt to equity ratio has jumped from 0.89x to 3.16x in the past five years and the current interest coverage ratio stands at 2.2x.
2. Hindustan Zinc Ltd
Next on our list is Hindustan Zinc, where the promoters, the Vedanta group, have increased the number of pledged shares.
From 22.8% as of the quarter ending December 2021, the promoters have pledged a total of 86.1% as of the March 2022 quarter.
However, in June 2022, the company announced they released the previous pledge of 80%, bringing down the number to 5.7%.
The group currently holds a 64.9% stake in the company.
The government of India also holds a 29.5% stake in the company but has not pledged any shares.
Infact, in a recent announcement the government has decided to sell its entire residual stake in the business to Vedanta.
Despite the fall in the total pledged shares from 86.1% to 5.7% as of June 2022, investors must keep a close watch on the stock and remain wary.
The stock price has fallen by over 20% since the beginning of the year, underperforming the market.
Hindustan Zinc is India’s largest and the world’s second-largest zinc-lead miner. With a reserve base of 150.3 m tonnes and mineral resources of 297.6 m tonnes, the company’s mine life is over 25 years.
Third on our list is Raymond.
The promoters, who hold 49.2% of the company, initiated a pledge of shares in the quarter ending March 2022. They pledged a total of 27.5% of their stake in the company, in addition to raising their stake by 0.2%.
While the reason for the pledging remains unknown, 27.5% is a very high number and you must not ignore it.
Raymond is one of the largest vertically and horizontally integrated manufacturers of worsted suiting fabric in the world with a dominant market share of over 60% in India.
Apart from this, the company enjoys a presence across diverse segments such as real estate, FMCG, engineering in national and international markets.
In the last 5 years, the company’s revenue has grown at a CAGR of 3.4%. The net profit has grown at a CAGR of 37.2%. The 5-Yr ROE average is 3.9%. The company has been reducing its debt.
Fourth on our list is PVR, where the promoter group have pledged 6.3% of their 17.1% shareholding in the company.
This is not the first time the promoters have pledged a part of their shareholding. They pledged 11.4% of their shareholding back in 2012.
While the reason behind the pledging is unknown, 6.3% is still a substantial number and a cause for concern.
PVR is in the business of film exhibitions. Apart from this the company operates other businesses such as providing content, film distribution and entertainment park through its subsidiaries.
The company is in the process of merging its business with Inox Leisure. In India, PVR competes with Cinepolis and Carnival Cinemas. These three players combined control over 70% of India’s multiplex market.
Before the pandemic, the business had been growing well. However, since then the revenues have fallen and the company has been making losses.
5. Max Financial Services
Last on our list is Max Financial.
The promoters hold a 14.5% stake through Max Ventures Investment Holdings. They have pledged more than 87.2% of their stake, raising a big red flag. Of the 87.2%, 23.6% of the pledging was in the quarter ending March 2022.
Apart from this corporate governance issue, there has been news of family feuds and embezzlement allegations that can also hamper the company’s performance over the long term.
The stock has fallen by over 19% since the beginning of the year, underperforming the broader market.
Max Financial, a leading private-sector life-insurance company generates about 60% of insurance premiums through its bancassurance partner Axis Bank which also owns a 6% stake in Max Life.
Max Financial boasts total assets under management of Rs 1 lakh crore. The profits have shot up in the last five years posting a 5-year CAGR of 7.5%. The business generated a 5-year average ROE of 20.1%. The company does not pay dividends.
Tracking promoter activities can help you better analyse a company’s prospects.
While some activities like an increase in stake are positive indicators, others like pledging of shares, are a big negative.
However, before drawing conclusions on a single activity, dig deeper. Look at the company’s financial health. Check if it’s healthy or deteriorating?
Find out the purpose behind the pledging and the use of the proceeds from the pledging of the shares. If it is not prudent, stay away from the company.
Since you’re interested in promoter pledging, check out Equitymaster’s powerful stock screener.
This tool keeps track of the companies where promoters have pledged their shares.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)