Bottomline: India Inc’s vulnerable may be ripe for consolidation

The era of consolidation is here. We’ve seen big moves across the industry landscape from cement to media to power to fast moving consumer goods (FMCG). "Big is better" seems to be the new business mantra.

In such a scenario, investors look to pick out leaders who’ll be standing when the dust settles, and some even acquire targets to invest in. The latter is a more risky, trickier task and requires much more careful study along with industry insights and information.

And while this is the best left to the experts, there are some interesting insights one can draw from the shareholdings of companies that investors need to pay attention to — for not just spotting the more vulnerable, but also from a general investment standpoint.

Today, we share some data on companies with less than 51 percent promoter control and what this data point can mean in case of a few on the list. Please note, just a low promoter holding isn’t enough to expect a change in hands.

We ran numbers for all companies listed on the NSE and sifted these for those with a market cap of over Rs 2,500 crore that had filed shareholding patterns for June 30, 2022. Of these, we found that 189 had promoter holdings of less than 50 percent. Of these, 77 had holdings of under 35 percent and 29 under 25 percent.

There were also a number of large companies, with market capitalisation greater than Rs 50,000 crore, who had promoter holdings less than 50 percent, but takeovers in such cases would seem difficult given the steep asking price for any such moves, besides certain other case-to-case specific factors.

 

But what we found beyond the mega corporates was a more interesting set of companies, where the asking price may not be so steep for a large business on the prowl. Most of these have market capitalisations of under Rs 10,000 crore, though there also a few a little shy of Rs 30,000 crore.

Should you assume that because these companies have low promoter holdings, they are vulnerable? That isn’t always the case. You need to dig deeper to understand the finer nuances.

We take a quick look at some of these names to give you a sense of why/why not. Remember, these are just quick takes. Investment in any of these names would require much deeper study - of not just the holding structure but also the strengths and weaknesses of a company that would make it attractive or unattractive to a prospective buyer.

We take a look at a sampling of a few of the above names to get a better sense of what their shareholding tells us beyond the headline promoter holding number.

The promoters own just 8.46 percent, but they are scientists and the business is focused on defence electronics. So, while an acquisition cannot be ruled out, it is more than likely any such move will likely require a buy-in from the existing management.

Not that this isn’t possible. The recent acquisition of control by Verandah Learning of JK Shah Classes is a case in point. Interestingly, veteran investor RK Damani is indicated as an individual with a 1.03 percent stake in the company.

The promoters of Barbeque Nation own 33.98 percent in the company with institutions collectively owning 43.3 percent. Interestingly, Jubilant Foodworks owns 9.38 percent in the company.

An individual owner of >1 percent stake is Ashish Kacholia with 1.05 percent. Does Jubilant Foodworks’ stake suggest something? Perhaps. Also, the asking price at current market value for the promoter’s stake would be near Rs 1400 crore.

Formerly part of the Avantha group, the company saw a change of control in 2015 with Temasek and Advent buying out the promoter stake (near 35 percent for about Rs 2,000 crore).

Interestingly, their stakes have come down significantly over time. Today, the promoter Macritchie Investments (Temasek) owns only 5.94 percent in the company.

Institutions collectively, and not with any large single player, own 82.25 percent. In that sense, this seems to be a truly board-driven company. Can it continue to be so, and will the numerous institutions back its independence? That remains the big question.

This engineering research and development focused services provider (ER&D) is often clubbed with other IT services companies, but actually operates in a different niche.

The promoters own 23.4 percent, of which 1.3 percent is encumbered/pledged. The institutions (domestic and foreign) collectively hold 56.56 percent and Tele Atlas Survey BV holds 1.36 percent. In the services industry, the role of management is critical to the growth of the company.

Whether institutions be willing to rock the boat remains a question which only time will deliver the answer to.

The cruise, casinos and gaming major has a promoter holding of 33.31 percent. However, there is concentration of the 21.3 percent institutional holding with HDFC Large Cap Fund alone holding 9.18 percent. Hence the stance of HDFC Mutual Fund becomes key in case of any overtures.

Dixon Technologies is a case in point for optical illusion. While the promoter holding stands at 34.3 percent (held by the Vachani family). Those not designated as promoters—Kamla Vachhani (7.44 percent), Atul B Lall (3.53 percent) — but seemingly close to the promoters or part of management collectively control another near 11 percent. This makes the company much less vulnerable.

The Hyderabad-based pharmaceutical player has a promoter holding of 27.27 percent, with institutions collectively holding 31.09 percent and a large residual free float. This makes the large float a key risk from a vulnerability standpoint.

The hospitality company, that has had a good run on the bourses, has an interesting holding pattern. The promoters hold 23.93 percent of which 14.72 percent is encumbered — here we must note that a pledge can be for several reasons like additional security for debt to the company or investment in another venture. So, it is incorrect to assume this is always a promoter leverage risk.

APG Strategic Real Estate Pool NV, Netherlands, a realty fund, owns a sizeable 14.99 percent and RJ Corp owns 4.09 percent. Domestic and foreign institutions collectively hold 39.32 percent. Given this, how APG Strategic Real Estate and RJ Corp swing remains an important variable for the company, in case of any inorganic proposals, apart from the institutions.

The chemicals company has a promoter holding of 29.7 percent, of which 3.06 percent is pledged. Institutions collectively hold 42.21 percent, while an individual Ajay Upadhyaya owns 1.01 percent. The shareholding structure does suggest a certain vulnerability, but that won’t be the only consideration for any possible M&A.

The Nazara Technologies shareholding has a very start-up feel to it with large individual holdings.

While the promoters own just 19.2 percent (97.57 percent of which is locked-in), Individuals Rakesh Jhunjhunwala owns 10.03 percent, Manish Agarwal 1.15 percent, NRIs Arpit Khandelwal owns 10.5 percent and Riyaz Sutewalla 1.52 percent, while entities Plutus Wealth (6.86%) and Unnati Management (1.97%) also own significant chunks.

This makes any decision on consolidation significantly dependent on the stance of such shareholders. The institutional holding in the company is a relatively low 15.65 percent.

Promoters of this star performer IT services mid-cap own 31.26 percent, while the Employee Trust holds another 2.83 percent. Institutions collectively control a big 46.39 percent chunk, while a few individuals also have significant stakes — Ashutosh Vinayak Joshi (1.28 percent) and Shridhar Bhalchandra Shukla (1.44 percent).

Like in the case of Cyient, being a services company, the management is critical to the business growth, and that will be a key factor in a move, if any.

In the case of TCNS Clothing, who owns large chunks is a critical factor. While the promoters (Pasricha family) own 32.25 percent, private investors Wagner (TA Associates) and Nalanda India own 29.24 percent and 7.01 percent, respectively, making them a key bloc in any decision.

And given that private equity investors typically look for exits after a few years, makes a transaction more likely. What’s more, there are individuals too with significant stakes — Vijay Kumar Misra (2.47 percent), Vijay Kumar Thadani – (1.22 percent) and Anant Kumar Daga (5.85 percent)—while the institutions holding is a relatively low 16.84 percent.

As can be seen from the above instances, just a low promoter holding may not be a cue for M&A, but keeping an eye on the shareholding pattern and the changes thereto can offer important insights to investors.

So, keep a watch on what emerges from the September filings.