De-listing Mania - Caution Advised
Anand Rathi was the pioneer that came up 12 potential delisting candidates, on January 12, 2012. Again on February 29, 2012, through our report "Potential Delisting Candidates – Too much too fast", we cautioned investors. There is a clear bubble formation in most MNC and other company stocks. Here, promoters hold more than 75% of the equity.
On June 4, 2010, the Union Finance Ministry came out with "Minimum Public Shareholding Guidelines", later (on August 9, 2010) revised.
PSUs are expected to maintain a minimum public shareholding of 10 per cent within three years. For the private sector, this is 25 per cent. That means that promoters of listed entities bring down their stake to below 75% by June 3, 2013. Companies can do so either by diluting or de-listing. Stock prices have shot up without support from fundamentals.
The market is expecting that such companies go in for delisting and is willing to pay any price. We are firm believers that the market is inefficient in the short term and corrects mistake only in long run. People are buying the stocks of such companies without knowing whether fundamentals are, or are not, supportive. In fundamental analysis is a concept called Margin of Safety, which is very important when an investor is putting money into a stock. Each business commands some value and a prudent investor buys a business (the stock) below its intrinsic value so that s/he can reap the benefits over the long term.
The present de-listing mania is similar to the dotcom bubble, where stock prices rapidly increased on the reasoning that i-tech companies would grow exponentially. Venture capital firms, fund managers, IT-sector analysts and investors had turned into "momentum pushers" rather than true "fundamentals", and built up the environment in which many investors were willing to overlook traditional parameters such as P/E ratios, P/BV, EV/EBIDTA, or free cash-flows in favor of over-confidence in technology advancements.
The bubble collapsed in 2000-2001 not only in the US but all also across the globe. Some companies, such as Pets.com, failed completely. Others lost a vast portion of their market capitalization but were stable and profitable, e.g., Cisco, whose stock plunged 86%. Some later recovered and surpassed their dot-com-bubble peaks, e.g., Amazon.com, whose stock went from 107 to 7 dollars a share.
The present situation, where promoters hold more than 75%, especially MNCs, is not very different from the dotcom bubble. Companies cannot grow infinitely and stocks are quoting at unjustifiable valuations – on any parameter, and clearly forming a giant bubble, which could burst at any moment. Astra Zeneca Pharmaceuticals, Fres.Kabi Onco., BOC India, Gillette India, Ineos ABS (India), Honeywell Auto, Blue Dart Exp., Oracle Fin.Serv., Wendt India are some examples where stocks have moved beyond justifiable fundamental prices. We would like to warn investors that any action either through an extension (beyond June 3, 2013) or through equity-dilution may prick that bubble.
A Bloomberg report says that the government could extend the deadline for owners to meet holding requirements.
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