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Splitting stock pays rich dividends

March 28, 2014 13:22 IST

Splitting stock pays rich dividends

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Deepak Korgaonkar in Mumbai

A sub-division in the face value of equity shares -- from a higher to a lower denomination -- has paid dividend, with stocks of select companies seeing a sharp rise after the split.

Of the 44 companies that split the face value of their stock since September 2013, the stocks of 16 saw gains of 50-300 per cent each.

In contrast, the benchmark S&P BSE Sensex and the CNX Nifty have gained 19 per cent and 21 per cent, respectively, while the S&P BSE mid-cap index and the S&P BSE small-cap index gained 30 per cent and 33 per cent, respectively, during the same period.

Liquidity-driven move

Promoters of small- and mid-cap firms are making a beeline to sub-divide their equity shares from their existing paid-up values to lower denominations.

The move is aimed at infusing liquidity and attracting wider investor participation, analysts say.

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Image: Promoters of small- and mid-cap firms are making a beeline to sub-divide their equity shares.
Photographs: Uttam Ghosh/Rediff.com
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Splitting stock pays rich dividends

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Once liquidity increases, more buyers and sellers trade in the stock, which in turn helps discover its true value.

In a stock-split, the shares outstanding are divided into a specific numbers of predetermined shares and the liquidity of the stock increases.

“A split increases the quantum of floating stock. As the value goes down, more investors buy stocks.

“Historically, the prices always go up after a split,” said an analyst with a local brokerage.

FII interest

A sharp rally in the equity market, a strong financial performance, and foreign investors’ interest in select companies have helped these stocks outperform the market.

For instance, Astral Poly Technik more-than-doubled from Rs 198 to Rs 479 after the company sub-divided its equity shares from Rs 5 to Rs 2.

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Image: In a stock-split, the shares outstanding are divided into a specific numbers of predetermined shares and the liquidity of the stock increases.
Photographs: Uttam Ghosh/Rediff.com

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Splitting stock pays rich dividends

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And, foreign institutional investors have increased their stake in the company substantially -- from 8.3 per cent in the December 2012 quarter to 15.8 per cent a year later.

Artificial leather/polyvinyl chloride manufacturer Mayur Uniquoters has seen its stock zoom 174 per cent -- from Rs 225 to Rs 617 -- after the stock split in September 2013.

The company has announced bonus shares in the ratio of 1:1.

Last week, the company’s board approved raising up to Rs 70 crore (Rs 700 million) through preferential allotments to private equity firm WestBridge Capital.

WestBridge will acquire 1.49 million compulsorily convertible participating preference shares at Rs 471.06 a share.

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Image: Last week, the company's board approved raising up to Rs 70 crore (Rs 700 million) through preferential allotments to private equity firm WestBridge Capital.
Photographs: Reuters

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Splitting stock pays rich dividends

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Fundamentals matter

Experts say before taking a position immediately after a stock-split, investors should look at a company’s fundamentals.

The key parameter to be evaluated while investing in a company that has gone for a stock-split is the valuation.

For instance, Kaveri Seed Company, trading at its record high, has appreciated 48 per cent -- from Rs 408 on January 27 this year to Rs 604 now.

The company has sub-divided its shares from Rs 10 to Rs 2.

For the first nine months of 2013-14, the agrochemicals firm has posted a robust 77 per cent year-on-year growth in consolidated net profit at Rs 207 crore (Rs 2.07 billion). 

“The current size of the domestic seed sector is estimated at Rs 12,000 crore (Rs 120 billion) and is expected to grow 12-15 per cent annually in the next three years.

Companies such as Kaveri Seed, which has a presence in cotton, paddy, corn and vegetables, have the advantage of crop diversification, which might help them gain from this,” Rohan Gupta and Chetan Thacker of Emkay Global said in their recent report on the sector.


Image: The key parameter to be evaluated while investing in a company that has gone for a stock-split is the valuation.
Photographs: Reuters

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