The big boys of India Inc are hiking their stakes in group companies through various financial instruments, which includes buyback of shares, subscribing to preferential warrants or purchasing shares from the open market, signalling a confidence in their company?s future earnings.
India?s richest businessman Mukesh Ambani, CMD of India?s largest company by market value Reliance Industries, and Subhash Chandra Goel, chairman of country?s largest television broadcaster Zee Entertainment Enterprises, have chosen to buy back shares from investors, while Kumar Mangalam Birla, chairman of the Aditya Birla Group, will purchase 1.65 crore preferential warrants for R1,500 crore in the next 18 months in Aditya Birla Nuvo (AB Nuvo).
The latest to jump on the bandwagon are the Mahindras, the owners of India?s largest tractor and sports utility maker Mahindra & Mahindra (M&M), who have chosen to increase their stake by purchasing small slots of shares from the stock market. The group has increased its stake in the last three quarters to 25.34% in the past three fiscal quarters between April and December 2011, overtaking domestic institutional investors? stake at 20.31% and a shade lower than the 26.30% owned by foreign institutional investors.
Between March 29 and March 30, Prudential Management Services, which comes under the promoter category on Bombay Stock Exchange, purchased 1,440,000 shares for R98 crore.
Companies buy shares for three reasons, said Vinay Menon, managing director (equity capital and derivatives markets) at JPMorgan Chase, an investment bank. ?First, when valuation of shares turn cheap. Second, promoters see an upside to share value from present levels. And third, to show confidence in the company,? Menon said.
Promoters? value of shares owned in M&M have rose steep in the past 11 years as its market value rose after the company transformed into the country?s largest sports utility vehicle and tractor maker. The 21.74% stake owned in September 2001 valued at R32.15 crore at R13.39 apiece has jumped to R10,649 crore for the promoters 25.34% they own now.
On Tuesday, Zee Entertainment Enterprises told its shareholders that it will spend R280 crore to purchase up to 2.09% outstanding shares of the company at R140 apiece, which if fully subscribed will hike the promoters? stake by 1% in a year. Zee has R1,050 crore. ?We want to return some money to our shareholders,? said a senior official. ?This business is not very capital intensive and we are evaluating available opportunities.?
?Wherever they find their holdings low or they believe there is value in their shares, promoters offer to buy back shares from the market,? said Arun Kejriwal, strategist at Kris Advisory. ?Preferential warrants are a signal by promoters to show their commitment.?
A low promoter ownership in any company is perceived as a takeover target. Last month, Goel purchased more than 11% stake in Hyderabad-based IVRCL, a real estate developer, overtaking Reddy?s stake at 11%.
In the early 1990s, after Ratan Tata took over the reins of the salt-to-software diversified group, he successfully increased the Tata Group?s shareholding in many of its group companies to over 30%. At one point of time, Pilani Investments, a holding company of the Birla Group, owned more shares than the Tatas in Tata Steel.
Reliance Industries will spend up to R10,440 crore between February 7, 2012, and January 19, 2013, to purchase up to 12 crore shares. The company has bought 42.03 lakh shares until March 29, 2012, data available on the stock exchanges show.
Birla will hike his stake by roughly 6% from 51.05% in AB Nuvo in the next 18 months after it gets shareholders? approval on April 25. ?As a conglomerate, it is progressing on a designed growth path to tap sector opportunities, particularly in the financial services, fashion and lifestyle and agri businesses,? Sushil Agarwal, chief financial officer, AB Nuvo, had told FE in an earlier interaction.
This is the second time Birla is increasing his stake in AB Nuvo in the past three years. In April 2009, the promoters invested around R1,000 crore as growth capital to grow its financial services business primarily insurance, which now accounts for 32% of revenues for AB Nuvo. The company leverage ratio rose to 5.8% and needed equity infusion as its insurance business was a money guzzler.
?Equity infusion is vital to maintain a fine balance between financing leverage and shareholder return,? Agarwal said. The present leverage ratio is 3.2% and of the R4,200 crore debt, the government owes Rs 950 crore as the subsidy of the agriculture business.
The promoters are worried about the market value of the AB Nuvo, a diversified conglomerate, as the value stands at R11,099 crore on Monday.
AB Nuvo owns 30% stake in Idea Cellular, which alone commands a market value of R32,746 crore. So, the current market value of AB Nuvo reflects only this value and rest of the business is not reflected in the share price of the other businesses from financial services to carbon black to fertlisers.
?Right now, we will purse growing organically, but will look at acquisitions opportunities time to time,? Agarwal said.
(Yoosef KP contributed to the story)
