Tuesday, November 29, 2011


Promoters resort to various modes of raising finance to meet their business and personal needs. Loan against shares is one such method of raising finance. Under this method, promoters pledge the shares held by them with lenders to get the required financing. These loans typically have tenure of one to three years and carry a margin requirement of two or three times. Simply put, it means that the value of the promoter’s shares pledged is two to three times the amount of loan. The method appears beneficial for promoters as well as lenders. The promoters get access to quick short-term financing whereas lenders charge premium rates for this short-term financing arrangement and also have about twice the value of the loan as pledge of shares with a right to sell the shares if the promoter defaults in repayment or if the value of pledged securities goes down.

The risks associated with pledging of shares are quite significant particularly from the promoter’s perspective. In case of default, a lender can sell the shares in the open market to recover their dues, which could result in a fall in stock price and erosion of market capitalisation. Also, promoters run the risk of losing management control if a significant portion of their
holding is pledged.

The term “pledging of shares” is looked upon with a needle of suspicion by investors. In a scenario of rising stock prices, there is no concern but if the price of the shares declines to a certain level, the promoters are required to make some payment or pledge more shares. If the promoter defaults or is unable to provide further shares as margin, then the lender has a right to sell the shares in the open market. Usually the quantity of shares sold by lenders is large resulting in an erosion of stock price. Companies with a high proportion of pledged promoter holding are susceptible to such erosion in stock prices. Investors tend to be wary of investing in such companies.

In the last 10 quarters, from the data available on pledged shares, we have been able to decipher that promoters have utilised pledging of shares to get loans on a regular basis. On an average, 8-9% of the promoter’s holding has been pledged during June 2009-September 2011. In the quarter ended September 2011, the percentage of promoter holding pledged has increased from 9.1% in June 2011 to 9.5%, whereas the percentage of total equity pledged has increased from 5.0% in June 2011 to 5.1% in September 2011. From June 2009 to December 2010, the Sensex was on a constant up move due to which pledging would not have caused alarm bells to ring as the value of shares would not have seen much of erosion in value. However, recently the markets have been weak. The Sensex has corrected by ~ 20% in the last three quarters, resulting in an erosion of market capitalisation of stocks and, hence, the value of shares pledged for securing loans. In such a scenario, companies that have taken loans against shares have to provide further margin in cash or pledge more securities to maintain the margin requirement. The companies that default may face the situation of selling of pledged shares by lenders resulting in a decline in stock prices and reduction in promoter holding.


>INSTITUTIONAL OWNERSHIP TRENDS: Off with risk, welcome to defensives

In the backdrop of weak market sentiments, institutional flows for the second quarter came in at a tepid USD1.4bn, the weakest in last 10 quarters. Overall ownership holdings for BSE-100 remain largely unchanged with FIIs owning about 17% of BSE-100 and DIIs owning about 12%. From a portfolio perspective, FII ownership levels have hardly changed despite a 20% sell off in markets in the last 12 months. Our analysis also suggests that the street may be underreporting the extent of DII ownership given that some companies report holdings by pvt insurance players under the “Corporate Bodies” segment. On a sectoral basis, both FIIs and DIIs have increased their relative weights within the pharma sector while scaling back on cyclicals. We estimate FIIs to have added most to their positions in M&M and ITC while slashing in SBI and Axis Bank.

Domestic ownership: Street seems to be understating
As per the current reported data, DIIs hold about 12% in BSE-100. However, we observe that it may be slightly understated given that some companies report the stake of private insurance companies within “corporate bodies” which is not a part of the institutional segment. Though we cannot pin down the precise amount of stake, our calculations for the Sensex universe suggests that Street may be understating the ownership of DIIs by at least 60bps.

FII ownership: Largely stable despite sell-off
Interestingly, between Q2FY11 and Q2FY12, BSE-100 index shed about 20% even as FII ownership levels remained largely flattish (a trivial decline of ~50bps only) in contrast to the trend in FY09 crisis period. We believe that the general risk-off environment has not yet induced selling across the board and that there remains a continued appetite for bottom up ideas. Interestingly, with the recent underperformance of India, FIIs have been deviating from the benchmark BSE-100 index in search of higher returns.

FIIs, DIIs up relative weightage in pharma, but scale down cyclicals
Within both FII and DII portfolios, there was an increase in the share of pharma sector relative to the benchmark BSE-100. FIIs have increased their underweight on global cyclicals (materials and energy) while positioning themsel ves 300bps below the benchmark within in that segment. DIIs have trimmed their relative position within domestic cyclicals. On an overall basis, FIIs are overweight on BFSI and software while DIIs are overweight on consumer and cap goods sector.

FIIs shed SBI, Axis, but stock up M&M, ITC
On an average price basis, we estimate that the highest FII selling in Q2FY12 took place
BFSI followed by materials. The largest buying was seen in consumers and auto. We estimate that SBI and Axis Bank within BFSI and Tata Steel and Hindalco within materials sector were the most sold while M&M was among the most bought.

To read the full report: OWNERSHIP TRENDS


>SANGHVI MOVERS: Demand sluggish, margins retained; we maintain a Buy at lower PT

Despite attractive valuations, the environment and outlook for Sanghvi Movers is challenging. However, business from the wind-energy and power sectors continues to grow, with fleet utilization up, to 84%. Despite lower yields, it holds to plans for `2.3bn capex in FY12. We retain a Buy but at a lower price target of `142 (earlier `194).

 Challenging environment; Sanghvi rethinks FY13 expansion. Due to the recession, foreign competition is looking to hire out cranes in India, at cheaper rates. Within India too, there have been delays in the execution of power projects and a slowdown in steel and cement capacity build-up. Sanghvi had bought 33 cranes for `1.5bn in 1HFY12, and is going ahead with its planned `2.3bn capex for FY12. However, considering the current challenging environment, it has not finalized FY13 capex.

 2Q revenue up 22.6%; margin maintained, profit down 40.8%. Sanghvi’s 2Q revenue growth was 22.6% yoy, in line with our estimate. Demand for cranes continues in power and wind turbines, and resulted in 84% utilization in 2Q for Sanghvi. The EBITDA margin was 71%, a 32bps yoy contraction, in line with our estimate. During the quarter overtime revenue was 6.2% of sales (~10% a year ago). Profitability was down 40.8% yoy, owing to one-offs during the quarter. Adjusted for this, net profit was 14.4% lower.

 We introduce FY14 estimates. For FY14, we expect revenue growth of 6.3% over FY13, with capex of `1.2bn in FY14 (`1bn in FY13e). We estimate 14.5% earnings growth in FY14 over FY13.

 Valuation. We lower FY12 and FY13 earning estimates 0.7% and 14.7%, respectively, to factor in an expected demand slowdown. The stock trades at 5x FY12e and 4.5x FY13e earnings. We re-iterate a Buy. Risks: lower demand, higher interest rates.

To read the full report: SANGHVI MOVERS