Unifi Capital has been a value investor in Indian capital markets for over 19 years now. This experience has helped us cultivate a critical skill and that is our ability to cull out key signals from all the noise out there.
As a value investor, it is absolutely essential to look at certain data points, and know, how to process this data. It is equally important to ignore certain other information - with clarity and understanding of why you are ignoring this part.
In March 2020, Mr. Maran delivered a virtual talk on Signals Vs. Noise. Watch this video here.
In this post, we decode for our readers our approach of spotting key signals and using this to our advantage. In the Signal Vs. Noise content series, we’ll be discussing one such signal in each post. In this article, our focus in on Insider Buying.
With the phrase Insider Buying, we’re referring to both Promoters and Executive Management increasing their stake in the companies they operate. Needless to add, this is totally different from Insider Trading, which is illegal.
Let us start with some data on the Sensex; Before the decline began, between Dec 2009 and Dec 2019, the BSE Sensex grew from the 17,000-mark to touch 40,000 points.
At the time when it touched 40,000 points, the total market capitalization of all listed companies was $2.1T. 50% of this $2.1T is covered by companies in the Sensex; 66% of the market cap is held by companies in the Nifty; 77% is held by Nifty 100 and 95% is held by Nifty 500.
The top 500 listed companies in India contribute to 95% of the market capitalization.
There is one more unique feature in India’s equity markets and that is promoter holding.
Over 55% of the entire market capitalization of Indian listed companies is held by promoters.
FIIs hold 20%, DIIs hold 13% and the balance is only 12%. So, unlike most other global markets, India is unique from the perspective of who the biggest investors are, and those are the promoters.
Let us observe what promoters did between Mar 1, 2020 and Mar 25, 2020 at the peak of the market decline. They were buying, along with mutual funds and other DIIs.
During the same time period, net FII selling stood at Rs. 58,000 crores. Retail investors and financiers were sellers as well.
Which Promoters are buying?
According to our research, 277 promoters increased their stake in group firms in the quarter that ended in March 2020.
Here are some highlights:
- Bajaj group bought shares in Bajaj Finance, Bajaj Finserv, Bajaj Auto and Bajaj Holdings
- Maruti and Hero Motors had seen promoter buying after many years
- HCL Tech promoters bought more than Rs. 300cr worth shares
- Godrej group bought more than Rs. 50 crore shares in Godrej Industries
- Tata group bought shares across the following companies: Tata Steel, Tata Chemicals, Indian Hotels, Tata Motors, Tata Consumer, and Tata Power
Financial Leverage is an important data item to track
Another extremely important point to note is that: 80% of the companies where promoter shareholding has increased in the March 2020 quarter have Debt to Equity (D/E) ratio of < 1x.
Promoters are contrarian investors?
In CY 2018 and CY 2019 – FMCG and consumer discretionary had been among the best-performing sectors, But in these sectors, only 9% of the total promoter buying happened during this time.
On the other hand, sectors like Automotive, Pharmaceuticals, and Metals saw a very low-return period. Yet, in these sectors, 35% of the total promoter buying happened during this period.
The above chart shows data on when promoters increased their stakes in their own companies. Promoters are buying when the markets are down, and they usually sell when they can raise money at a higher valuation.
The following chart shows when Motilal Oswal Financial Services did its IPO and when it engaged in a Buy Back (Promoter Buying).
Here’s a list of various companies where promoters increase their stakes in March 2020.
For value investors - it is a signal that it is a good idea to see which promoters are buying. A downturn is certainly a good time to buy, but the bigger question is, often, what to buy?
Using promoter buying as a filter can be a good starting point. Here are some key questions that are often asked:
Should we buy when promoters are buying?
But, should we evaluate when promoters are buying?
Is a patter of promoter activity a better reflection of market valuation rather than a distinct trade?
Is a patter of promoter activity in a particular sector a better reflection of valuation?
Additionally, movement in shareholding is more important to observe and note than an absolute high stake.
But the most important question is this:
Do all companies with promoter stake increase witness better shareholder return in the long term (say 3 years)?
Not all, but several of them do.
Of course, it is critical to identify opportunities based on a lot more analysis.
Some good pockets of opportunities can be spotted using the following criteria (for value investors):
- Companies with strong balance sheets, but with cyclically lower earnings.
- Companies with sustainable consumptions but with near-term challenges
- Contrarian bets
At Unifi Capital, our investment and research teams specialize in conducting a deep data-driven analysis capital markets, in addition to conducting a bottom-up analysis of companies. One of our funds is our Insider Shadow fund.
Through this fund, our objective is to ‘Generate superior risk-adjusted returns, in relation to the broad market, by investing in fundamentally sound companies where the promoters’ have acquired additional shares at market prices or companies that have repurchased their own shares. Typically, such an action by a company or a controlling shareholder demonstrates their conviction that the company’s growth prospects or inherent value have not been captured in its stock price at that point.’
Signal Vs. Noise is going to be a regular feature in Stories by Unifi. Stay tuned to this space for more posts.
Give us a shout if you’d like to have a conversation with one of our experts, especially regarding Unifi Capital’s Insider Shadow fund.
Visit http://unificap.com/ for more information.
Unifi Capital Pvt Ltd is registered with SEBI under PMS/Stock Broker/Investment Manager of AIF’ and a Depository Participant and is regulated by the relevant Acts Rules and Regulations stipulated by the Securities and Exchange Board of India, Stock Exchanges and Depository.
The information provided on this website does not, and is not intended to, constitute any sort of advice for Investments in the Capital Markets. All information, content, and material available on this site are for general informational purposes only. The views, opinions, ideas etc expressed are purely of the Authors writing in their individual capacity. Unifi has neither approved nor supports the views expressed herein.
The views expressed being purely for information purposes should not be construed as an Advice or Recommendation. Unifi strongly recommends the reader to seek independent advice from a Professional Advisor.