Promoters cash in on market rally, offload shares to pare debt

Promoters of five companies — Bharti Infratel, Escorts, McLeod Russell India, Relaxo Footwear and Action Construction Company — have sold equity shares worth nearly ~4,000 crore through open market transactions in the past three weeks to cut debt. According to disclosures, they made to the stock exchanges, institutional investors led by foreign portfolio investors (FPIs) bought these shares. Experts attribute this to buoyant markets that have provided an opportunity for promoters to raise funds via stake sale.

Bharti Airtel, via its wholly owned subsidiary Nettle Infrastructure Investments, sold 83 million shares in subsidiary Bharti Infratel through a secondary share sale for a total of ~3,325 crore in November. Allocation, according to the company, was done to global investors, fund managers and long-only funds. Bharti Airtel plans to use the proceeds to reduce debt, the company said .

McLeod Russel, the world’s largest tea producer, had raised ~204 crore by offloading 9.14 per cent stake in the open market. Kamal Kishore Baheti, in his capacity as trustee for Borelli Tea Holdings, sold 10 million shares of McLeod Russel on November 30.

In the past two and a half months, the promoters of mid- and small-cap companies such as Asian Granito, Hatsun Agro Products, Arshiya and GNA Axles sold shares through the open market, according to disclosures made by these companies to the exchanges.

Experts say promoters selling a small stake to raise funds and paring debt when stocks are near all-time high levels is a better strategy as opposed to refinancing the debt, as they can capitalise Bharti Infratel Escorts McLeod Russel India Action Constructions Relaxo Footwears 3,325 on the bull-run in the markets.

“Stake sale by promoters is a good strategy to pare debt. We are in the midst of a big bull market and a lot of stocks are trading at peak valuations. On the other hand, debt levels for some are also rising. By selling stake in the markets, promoters are able to encash on these premium valuations and cut debt on the company’s books,” explains G. Chokkalingam, founder & managing director, Equinomics Research. “Refinancing has pros and cons. The promoters would still have to bear the interest burden, besides paying back the debt. Stake sale in current market conditions is a win-win situation.”

Thus far in calendar year 2017 (CY17), stocks of all these companies have outperformed the markets by rising 49-236 per cent. By comparison, the S&P BSE Sensex and Nifty 50 have 382 gained around 24 per cent each during this period. Bharti Infratel, however, underperformed the market, up 11 per cent thus far in CY17. The stock corrected 21 per cent from its 52-week high of ~482 on October 17.

Analysts expect promoters to continue paring stakes in their companies to retire debt, so long the markets remain buoyant. They, however, do expect promoters of every company to raise funds via this route.

“One needs to analyse on a caseto-case basis. While it makes sense for promoters of companies saddled with high debt to sell stake when valuations/stock price is near high levels, it may not be a prudent strategy for others. That said, one can expect this trend to continue as long as the market conditions remain supportive,” said Krish Subramanyam, co-head for equity advisory at Altamount Capital.