No one understands the business situation for any company better than the promoters. After all, promoters are the first ones to have access to sensitive information that can bring potential upside, or downside, to a stock's price. Watching this space therefore, becomes crucial for the investing community for its extremely revelatory advantages.
This allows gauging of the significance of stake increases, or decreases, by promoters. The timing can be important too - are they increasing their stake in a falling market, or selling out?
No prizes for guessing that the promoters want to increase their stake if the business is going strong. More so when its stock price is coming down.
A variety of reasons may prompt promoters to adopt this line of action. They may want to increase their stake and then pledge it to raise funds in the future; increase management control over the company; support plummeting share prices; or simply because they find a certain price level attractive to raise their stake as they can foresee a very positive future for the company and have the cash to back that up.
While we do believe that increasing promoter stake is a strong signal of a sound investment potential, in extreme cases the motive might be just to gain from price changes.
When we went looking for such companies where the promoters had increased their stake during the downturn (December, 2007-March, 2009), we ensured that they did not sell their stake after March, 2009, when the markets skyrocketed.
Additionally, we ensured that the companies that we were looking for were not high on debt. High interest costs can cause trouble when earnings take a dip in difficult market situations. Also, to make sure the company is not trading at too high a price, we checked its price-to-book (P/B) value ratio. Here then, are the dear-to-the-promoters companies.
The company has a presence in apparel fabrics, home textiles and cotton yarn. It operates in the export segment of the textile sector, supplying to clients such as Walmart Stores Inc., Nautica and Zara. For Q3FY10, the company reported a 13 per cent YoY increase in exports and 51 per cent YoY increase in operating income. In Q3FY10, majority of the revenue was derived from the apparel segment (47%), followed by polyester yarn segment (29%). However, the interest cost for Q3FY10 for the company has more than doubled YoY, raising concern.
The first provider of 3G services to Indian cell phone operators, Tanla is also a global provider of mobile commerce, mobile entertainment, mobile marketing and advertising solutions to telecom, media and digital content industries. It provides fully managed services, including end-to-end mobile content management.
The U.K. is its largest market, where regulatory changes coupled with a drop in premium transactions have caused its revenues to take a major dip. On a standalone basis, its revenues for Q3FY10 were lower by 48 per cent quarter-on-quarter (QoQ). Its zero-interest cost gives it an edge over others in the group.
In the last fiscal, the company's gross revenue from India accounted for about 10 per cent. The company has plans to prioritize its focus on growing mobile markets like India, Africa and Latin America.
This is a jewelry-maker and retailer. It has several established brands to its credit that have added momentum to its growth, allowing the company to also expand into lifestyle products like luxury watches, silwerware, perfumes, writing instruments, silver and other fashion jewelry. While the jewelry market is dominated by the unorganised sector, the company stands to gain from increasing disposable incomes and by bringing branded products in the changing consumption environment.
Deepak Fertilizers & Petro
While net sales remained at earlier levels, operating profits grew by 35 per cent YoY. The company has a presence in industrial chemicals, specialty retailing and agri-business. Its chemicals business, which contributed almost 60 per cent to its Q3 revenues, grew by 22 per cent YoY in Q3FY10 on the back of strengthening chemical prices and increasing volumes across all chemical products.
It has also had the highest interest coverage ratio in our group.
This auto ancillary company has improved its sales and operating profit margins for the past two quarters, and figured in our other stock screening as well. The company trades at a P/B ratio of 0.51.