Declining floating stocks of leading bluechip companies may be adding to their valuation premium. As Indian markets witnessed their fair share of ups and downs since early 2008, the general liking towards quality stocks, such as the top-traded bluechip companies, has led to higher institutional buying of these counters.
Even promoters in general have increased their ownership in the leading large-cap companies during the period.
As a result, the quantum of floating stocks — arrived at by excluding ownership of promoters and institutional players like foreign portfolio investors (FPIs) and mutual funds and insurance companies from the total shares available — has come down.
While the observation is true for nearly two third of the Nifty universe, at least 14 Nifty companies have seen a more than 5% dip in floating stocks calculated in this manner. For companies like Hindustan Unilever, Sesa Sterlite, Ultratech cement, ACC, Ambuja Cement and Asian Paints, a substantial increase in promoter stake since 2008 has led to lower floating stocks.
On the other hand, for companies like IndusInd Bank, Lupin, Infosys, Cipla and HCL Tech, a sharp jump in the institutional ownership is responsible for lower floating stocks.
Experts point out that to ride through a difficult market cycle, the penchant for quality companies has led to higher institutional buying and that is well reflected by the valuation expansion witnessed by some stocks.
According to Manishi Raychaudhuri, Asia-Pacific Strategist, BNP Paribas Securities, while quality stocks have always traded at a premium, today the PE multiples of some of these are at record high with the premium constantly expanding over the last two to three years. “Investors are willing to pay premium for growth and earnings visibility,” added Raychaudhuri.
Currently, HUL, Cipla, Lupin and IndusInd bank trade at a premium to their earnings multiple in 2007. While earnings and price potential are definitely the key drivers for expanding valuations, increased demand from institutional investors has also supported this growth. Various estimates suggest that the foreign institutional investors now own nearly 21% of Indian equities as of December 2014, a record high.
Andrew Holland, CEO, Ambit Investment Advisory, points out that a lot of exchange-traded fund (ETF) money has made its way into Indian market in the last couple of years. “These funds made allocation in proportion to index weights of bluechip stocks, and that has played a role in pushing up prices of some leading stocks,” he added.
Experts, however, say that higher institutional stakes in leading large-cap stocks do not majorly affect the liquidity on these counters nor do they limit buying opportunity for retail investors. “I am not surprised with your findings. As mutual fund and insurance investing grow in size, this is bound to happen unless fresh issuance are very high. For an absolute retail perspective, this does not impact buying opportunities,”said Aneesh Shrivastava, chief investment officer, IDBI Federal Life Insurance.
However, an investor who needs to obtain a substantial chunk of a large-cap company may have to shell out a higher cost due to lower supply.
“While investors can seek out their buying interest through a block trade, depending on the supply they may have to pay a higher price,” added Holland.