Santosh Nair
moneycontrol.com
What is a good indicator of whether a stock is over-valued or undervalued? Seasoned investors say insider buying or selling tells you much more than profit & loss statements or disclosures to the stock exchanges. Also, promoters or senior management staff buying shares can be seen as a sign of the stock being undervalued. But they selling shares need not always be interpreted as the stock being overvalued. Here is another fairly good indicator of whether a stock offers value: a rival company or its promoter buying stake. This sends a stronger signal to the market than when a high networth investor or a star fund manager backs it. There are two reasons for it.
One, being in a similar line of business, the rival company/promoter would have a good understanding of the business, as well as market intelligence on how far the numbers can be trusted. Two, a rival will be more careful of committing money because he will be indirectly endorsing that stock, and at the same time have less information than the promoter of that company. In the recent past, promoters have bought their own shares through creeping acquisition or buyback programs, more to signal a floor price for their battered stocks. Competitors will have no such motives while buying the shares.
Last week, Dilip Shanghvi, the low-profile promoter of Sun Pharma picked up 10 lakh shares or 3.5% of Natco Pharma from the market through two bulk deals. The reason behind the purchase is not known. Natco Pharma’s management is unfazed because promoters control roughly 60% of the company. There is speculation that Sun Pharma might enter into some business deal with Natco at a later date. Perhaps, Shanghvi may have bought it purely as an investment because he is bullish about the prospects of the company. Over the last five years, Natco Pharma has doubled both its annual topline and bottomline to around Rs 350 crore and Rs 53 crore respectively. Consistent, but not spectacular. But the key trigger for the company, some analysts say, could lie in Natco’s para IV filings (challenging existing patents) in the US, which if successful, could vault the company’s earnings to a different orbit. At the same time, there is an equal probability that none of the filings may succeed.
In a similar development just a couple of days after Shanghvi’s purchase of Natco shares, home loan company Dewan Housing Finance picked up 20 lakh shares of Kerala-based Dhanlaxmi Bank in the open market.
Shares of Dhanlaxmi Bank are yet to recover from the steep fall they suffered in October, after one of the employee unions raised questions about the bank’s financial health.
There are not too many instances of ‘outsider’ stake purchases in India’s corporate history. This also could have to do with cultural reasons as such transactions, unless solicited, tend to be viewed suspiciously even if hostile takeovers are rare. But the few times such deals happened; the target stocks saw some action few years down the line.
The earliest instance of a seemingly innocuous outsider buying was in 2001 when ITC bought stake in East India Hotels (now EIH Ltd) through its subsidiary Russell Credit. ITC claimed it was purely an investment decision, but kept raising its stake over the years and now owns roughly 15% in the company. But for RIL coming to the rescue of EIH promoters last year by picking up a 14% stake, ITC may have made a hostile bid for the company. But ITC may not have given up on its takeover plans altogether. It still owns 13% in Hotel Leelaventures, a stake it has built over the last three years.
In 2001, ITC had played White Knight to rival tobacco firm VST Industries, when Mumbai-based portfolio investor Radhakishen Damani had made a hostile bid for VST. Damani’s bid was foiled and there have been no more hostile bids for VST since. But VST shares have risen nearly 15 times in the last 10 years.
In 2003, Asian Paints picked up a 9.2 stake in rival ICI India when the government sold its stake in the paints and specialty products major. Asian Paints may have wanted to increase its stake over time, but Akzo Nobel’s global takeover of ICI put paid to those hopes. ICI India now operates under the brand name Akzo Nobel. Asian Paints has trimmed its stake, but still holds 5.46%.
In April 2008, pharma major Ranbaxy—through its investment arm--picked up 14.7% in rival pharma company Orchid Chemicals. The promoters of Orchid had borrowed money by pledging shares, and failed to deposit additional margin when the stock price weakened. The lender dumped the shares causing the price to crash from Rs 250 to Rs 110. Incidentally, the lender was Religare, a Ranbaxy group company. Ranbaxy’s purchases fired up the stock from Rs 110 to Rs 330 in less than a month. There was talk of a hostile takeover bid, but that never materialized. In October 2010, Ranbaxy exited Orchid, making a decent return on its investment.
There are a few of instances where industrialists have picked up stakes in companies unrelated to their core business. One notable instance is the Sheth brothers of Great Eastern together owning an 8% stake in Financial Technologies.
The question is: does a stock make a good bet just because a rival firm or its promoter has bought a stake in it?
The ordinary investor has to keep in mind outsiders often have a long term game plan while buying stakes in their rivals. Unless you are as patient, it may not make sense to follow someone blindly. For instance, ITC started buying shares in EIH in 2001, but it was only in 2010 that a hostile bid looked a possibility. Also, Reliance Industries’ buying stake (through its investment arm) in EIH at a premium to the market price in August last year raised hopes of the EIH stock getting rerated. At Friday’s closing price of Rs 85.80, EIH shares are 47% below the Rs 184 per share that RIL had paid for the stake.
Orchid shares trebled from Rs 110 to Rs 330 in April 2008 immediately after Ranbaxy’s group company bought stake in it. However, the stock kept sliding after that, and regained those levels only in October 2010, after Ranbaxy divested its stake in the company.
In short, do your homework before making your investments; don’t depend on somebody else to do that for you.
moneycontrol.com
What is a good indicator of whether a stock is over-valued or undervalued? Seasoned investors say insider buying or selling tells you much more than profit & loss statements or disclosures to the stock exchanges. Also, promoters or senior management staff buying shares can be seen as a sign of the stock being undervalued. But they selling shares need not always be interpreted as the stock being overvalued. Here is another fairly good indicator of whether a stock offers value: a rival company or its promoter buying stake. This sends a stronger signal to the market than when a high networth investor or a star fund manager backs it. There are two reasons for it.
One, being in a similar line of business, the rival company/promoter would have a good understanding of the business, as well as market intelligence on how far the numbers can be trusted. Two, a rival will be more careful of committing money because he will be indirectly endorsing that stock, and at the same time have less information than the promoter of that company. In the recent past, promoters have bought their own shares through creeping acquisition or buyback programs, more to signal a floor price for their battered stocks. Competitors will have no such motives while buying the shares.
Last week, Dilip Shanghvi, the low-profile promoter of Sun Pharma picked up 10 lakh shares or 3.5% of Natco Pharma from the market through two bulk deals. The reason behind the purchase is not known. Natco Pharma’s management is unfazed because promoters control roughly 60% of the company. There is speculation that Sun Pharma might enter into some business deal with Natco at a later date. Perhaps, Shanghvi may have bought it purely as an investment because he is bullish about the prospects of the company. Over the last five years, Natco Pharma has doubled both its annual topline and bottomline to around Rs 350 crore and Rs 53 crore respectively. Consistent, but not spectacular. But the key trigger for the company, some analysts say, could lie in Natco’s para IV filings (challenging existing patents) in the US, which if successful, could vault the company’s earnings to a different orbit. At the same time, there is an equal probability that none of the filings may succeed.
In a similar development just a couple of days after Shanghvi’s purchase of Natco shares, home loan company Dewan Housing Finance picked up 20 lakh shares of Kerala-based Dhanlaxmi Bank in the open market.
Shares of Dhanlaxmi Bank are yet to recover from the steep fall they suffered in October, after one of the employee unions raised questions about the bank’s financial health.
There are not too many instances of ‘outsider’ stake purchases in India’s corporate history. This also could have to do with cultural reasons as such transactions, unless solicited, tend to be viewed suspiciously even if hostile takeovers are rare. But the few times such deals happened; the target stocks saw some action few years down the line.
The earliest instance of a seemingly innocuous outsider buying was in 2001 when ITC bought stake in East India Hotels (now EIH Ltd) through its subsidiary Russell Credit. ITC claimed it was purely an investment decision, but kept raising its stake over the years and now owns roughly 15% in the company. But for RIL coming to the rescue of EIH promoters last year by picking up a 14% stake, ITC may have made a hostile bid for the company. But ITC may not have given up on its takeover plans altogether. It still owns 13% in Hotel Leelaventures, a stake it has built over the last three years.
In 2001, ITC had played White Knight to rival tobacco firm VST Industries, when Mumbai-based portfolio investor Radhakishen Damani had made a hostile bid for VST. Damani’s bid was foiled and there have been no more hostile bids for VST since. But VST shares have risen nearly 15 times in the last 10 years.
In 2003, Asian Paints picked up a 9.2 stake in rival ICI India when the government sold its stake in the paints and specialty products major. Asian Paints may have wanted to increase its stake over time, but Akzo Nobel’s global takeover of ICI put paid to those hopes. ICI India now operates under the brand name Akzo Nobel. Asian Paints has trimmed its stake, but still holds 5.46%.
In April 2008, pharma major Ranbaxy—through its investment arm--picked up 14.7% in rival pharma company Orchid Chemicals. The promoters of Orchid had borrowed money by pledging shares, and failed to deposit additional margin when the stock price weakened. The lender dumped the shares causing the price to crash from Rs 250 to Rs 110. Incidentally, the lender was Religare, a Ranbaxy group company. Ranbaxy’s purchases fired up the stock from Rs 110 to Rs 330 in less than a month. There was talk of a hostile takeover bid, but that never materialized. In October 2010, Ranbaxy exited Orchid, making a decent return on its investment.
There are a few of instances where industrialists have picked up stakes in companies unrelated to their core business. One notable instance is the Sheth brothers of Great Eastern together owning an 8% stake in Financial Technologies.
The question is: does a stock make a good bet just because a rival firm or its promoter has bought a stake in it?
The ordinary investor has to keep in mind outsiders often have a long term game plan while buying stakes in their rivals. Unless you are as patient, it may not make sense to follow someone blindly. For instance, ITC started buying shares in EIH in 2001, but it was only in 2010 that a hostile bid looked a possibility. Also, Reliance Industries’ buying stake (through its investment arm) in EIH at a premium to the market price in August last year raised hopes of the EIH stock getting rerated. At Friday’s closing price of Rs 85.80, EIH shares are 47% below the Rs 184 per share that RIL had paid for the stake.
Orchid shares trebled from Rs 110 to Rs 330 in April 2008 immediately after Ranbaxy’s group company bought stake in it. However, the stock kept sliding after that, and regained those levels only in October 2010, after Ranbaxy divested its stake in the company.
In short, do your homework before making your investments; don’t depend on somebody else to do that for you.
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