Friday, November 25, 2011

Pledged Companies - Avoid

MUMBAI: Pledged shares continue to hang like a sword over the stock market. According to the latest data, promoters of about 376 companies, out of the listed 1,214, with market capitalisation in excess of Rs 100 crore, have pledged their shares to raise funds.

Total promoter pledge positions in terms of value touches Rs 1.1 lakh crore as on mid-November, said a Crisil Research note.

In as many as 14 companies, promoters have pledged 90% plus of their holding, thereby exposing the companies to the risk of losing promoter control and also higher share-price volatility if the prices fall from its current levels.

Over 100 companies have pledged 50% of their owners' equity as lien, while promoters of 183 companies have placed 25% or more of their shareholding as lien. Companies in power, IT & ITeS, infrastructure and pharma sectors have seen higher levels of pledging, the Crisil note said.

"Markets have been volatile due to concerns of high domestic inflation, rising interest rates and tepid global economic environment. These concerns have triggered a fall in the stock prices, creating pressure on promoters who have pledged shares to make good the loss in the value of the collateral," said Mukesh Agarwal, senior director, Crisil Research.

According to brokers, investment in companies with higher promoter pledge exposes investors to severe price volatility. About half of the 300-odd mid-cap companies on BSE have fallen in the range of 20-85% over the past one year.

The trend is even worse in the small-cap segment where over 375 of the 500-odd actively-traded stocks have declined in the range of 20-95% in a year's time. With funding costs remaining high, promoters who have pledged their holdings will not be in a position to cough up money or more shares to prevent lenders from dumping the shares. This will lead to a further fall in prices.

As per reports put out by leading brokerages, promoters of companies like Ganesh Benzoplast, Spentex Industries, XL Energy, Gujarat Pipavav Port and Tata Coffee have pledged their entire shareholding to raise funds.

SpiceJet, Gujarat NRE Coke, United Spirits, Gati, Gayatri Projects, Raj Oil Mills, Birla Power Solutions, GTL, Koutons Retail, Western India Shipyard and Edserve Softsystems, among others, are companies where its promoter groups have pledged 85-99% of their equity. Almost all these stocks have fallen 5-45% since the beginning of November.

"Promoters of large corporates may be able to withstand margin pressures associated with pledged shares. Mid- and small-cap companies may find it extremely difficult in the scenario of a collapse of share prices and eventual trigger of margin calls," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

According to Krishnakumar Karwa, managing director of Emkay Global Securities, financiers have started selling shares that are being held as collateral. "Volumes in mid-cap counters have come off sharply over the past few months. Every sell order at lower prices is causing stocks to correct deep. The sell-off has been aggravated because of margin calls," Karwa said.

Our Recommendation :

As the market has decisively turned negative investors should avoid these shares which are more vulnerable to wild fluctuations.  The lenders will look at best price to exit in case of deep cuts.

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