Stock markets: Check parentage of target company before betting on it

Updated: Dec 13, 2019 8:27 AM

What Rithika didn’t know was that besides company fundamentals and market sentiment, there could be other factors at play. Let us look at some of these extraneous factors that influence share price movement despite no apparent shift in the actual company performance or direction.

Stock markets, Check parentage, target company, LIC, IDBI, IDBI bankWhat was common, however, was their parent company—the Aditya Birla Group —which had entered into a joint venture with Vodafone Group to form Vodafone Idea.

By Hemanth Gorur

Rithika had invested Rs 1 lakh in the shares of a telecom major. After seeming to do well for about a year, the share price started plummeting alarmingly. Within no time, Rithika’s investment value dropped to Rs 60,000. She could not understand why the stock was underperforming since the telecom company was doing well financially and was profitable.

What Rithika didn’t know was that besides company fundamentals and market sentiment, there could be other factors at play. Let us look at some of these extraneous factors that influence share price movement despite no apparent shift in the actual company performance or direction.

Business decisions of parent firm
On October 24 this year, Supreme Court of India handed out a ruling on Vodafone India that left the telco facing more than Rs 28,000 crore dues in additional license fees and over Rs 11,000 crore dues in spectrum usage charges. Unsurprisingly, the share price of Vodafone Idea plunged. But what was shocking for small shareholders of Grasim Industries was the 5% drop in share price of Grasim triggered by the Supreme Court judgment. The two companies were seemingly different entities and were in unrelated sectors—one was in telecom while the other was in the apparel industry.

What was common, however, was their parent company—the Aditya Birla Group —which had entered into a joint venture with Vodafone Group to form Vodafone Idea. Not just that, Grasim Industries had around 11.6% stake in Vodafone Idea. Retail investors who were in the dark about these shareholding patterns and developments regarding the parent company would have been caught unaware.

Parent company need not be private sector
The private sector is so entrenched in the minds of news-savvy retail investors that sometimes they are blindsided to the fact that parentage of a company need not lie in the private sector. Many a time, the government can indirectly be the parent through state-owned companies.

Last year, Life Insurance Corporation of India (LIC) was given the go-ahead by the Insurance Regulatory and Development Authority of India (Irdai) to become the majority stakeholder of beleaguered state-owned lender IDBI. Experts felt that this was not in the best interests of LIC policyholders since the losses of IDBI would eat into policyholder benefits. The same can be said for retail shareholders of LIC Housing Finance, owned by LIC. Post the cabinet approval of the LIC-IDBI deal last year, LIC Housing Finance share price fell for 40 straight days, losing up to 30% of its value.

Holding companies and intricate shareholding
While it was relatively easy to decipher the shareholding patterns in the above examples, it may not always be the case. Very often, company ownerships are obscured by intricate or nested shareholding patterns that see multiple layers of ownership. Retail investors should study the shareholding patterns of the target company they intend to invest in. Sometimes, a small insight into the behaviour of or developments related to the true owner of the target company can aid in taking the right investment decision.

So study the target company well before taking an investment decision.

The writer is co-founder, Hermoneytalks.com

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