Can You Predict Share Price From Promoter Holding Patterns?

Recently, Vineet Nayyar, Executive Vice Chairman, Tech Mahindra sold more than 5 lakh shares that he held in the company. What does this spell for the future share price of the company? Are we looking at a fall in the company’s share prices from here on?

The promoters or members of the top management, who are at the helm of affairs, are supposed to be in a better position to foresee the performance of a company. It is believed that they buy or sell their shares in the company depending upon their judgement of the company’s future performance (though this is not always true).

Therefore, the share price of a company is likely to see an upward movement if a promoter or top management member continuously buys its shares, or may dip in the event that the promoters are selling. Conversely, promoter activity may give some indication on the future movement of a company’s share.

To decipher this relation, we studied the BSE 200 data for the past five quarters ending September 2013. For the purpose of our analysis, we calculated the change in promoter holding and in the share price from the start of June 2012 till the end of September 2013. We excluded those companies that have gone for corporate actions like splits, bonus or other such actions in this period, including Asian Paints, Mahindra & Mahindra Financial Services, Sesa Sterlite, etc.

Findings

Our research on companies for the period shows that analysing changes in promoter holding may not be very useful in predicting the change in share prices. Out of 176 companies, there were only 26 wherein we saw a direct co-relation between an increase in promoter shareholding and the share prices. Bhushan Steel was one of these – it saw its promoter holding increasing by 11% over the 5 quarters ending September 2013, and the share price of the company increased by 12% in the same period. Similarly, there were 16 instances where the promoter holding went down along with the share prices.

In all, the prices and promoter holdings have moved in the same direction only 24% of the times, i.e. on 42 occasions (26+16) out of the 176, against 76% of the instances when the movement was in opposite direction. In fact, there were as many as 23 instances when the share prices dropped despite the promoter holding moving up. For example, the promoters of Bharat Forge increased their stake in the company from 42.05% at the end of September 2012 to 46.74% at the end of September 2013. Despite this, its share price fell by 14% in the same period.

We also undertook a regression analysis to find out if a change in promoter holdings impacted companies’ share prices. There too, we found that a change in holdings does not impact the prices.

Coming back to Tech M, Vineet Nayyar has stated that the funds would go towards charity, and hence, we have not seen any material change in the share price. In fact, in today’s trade, Tech Mahindra’s share price is up by 0.5% while the market has remained flat.