The Hindu Business Line : Stock split and the art of wealth creation

Coimbatore, July 20 As the countdown to Sesa Goa’s stock split (and 1:1 bonus issue) record date begins, the spotlight has turned on the question of whether stock split leads to increased liquidity and greater wealth creation among retail investors.

What has created increased expectations is the fact that many high-value shares such as Motilal Oswal Financial Services and Madras Cements have queued up for stock split and Madras Cements also has announced 1:1 bonus issue. Some of the associate banks of SBI such as State Bank of Bikaner and Jaipur (SBBJ) and State Bank of Travancore (SBT) could be potential candidates for stock split as the current share face value at Rs 100 keeps the share prices rather high, affecting liquidity.

Several companies had in the past taken the stock-split route to reduce the face value of shares to Re 1 or Rs 2 or Rs 5 or Rs 10 (from Rs 100) so as to create more liquidity and make more shares available for trading. Companies such as Hero Honda, Gujarat Ambuja Cements, ACC, ITC, Hindalco, Jindal Steel and Power, Pidilite; software majors such as Infosys, Satyam and Wipro to name a few; and many companies in Coimbatore with small equity base such as LMW, Pricol, L.G. Balakrishnan and Bros, Elgi Equipments and Shanthi Gears resorted to stock split for greater investor participation in trading. Some of these companies, in the process, helped generate great wealth for the shareholders. But stock split alone did not do the trick and their consistent performance was a major contributor.

Impact on trading volume

While share price reduction may help create greater liquidity, this is not sufficient to ensure sustained high-volume trading. Sesa Goa, which has fixed August 18 as the record date for stock sub-division (face value being reduced to Re 1 from Rs 10) and bonus issue, witnesses a huge volume of trading despite the high value. On Friday the counter recorded a volume of 2.38 lakh shares on BSE with the share price closing at Rs 2,718.95. What makes the share in such high demand is Sesa Goa’s performance — the EPS last year was a whopping Rs 379 and the P/E ratio is a mere 7.17.

Price does not seem to be a deterrent for another stock that recently witnessed stock split — Jindal Steel and Power Ltd. Despite the low equity base of Rs 15.4 crore and high price, the counter registered trading of 1.18 lakh shares on Friday on BSE, with the last traded price being Rs 1,743.10. Again it is performance that is tilting the scales — the EPS last year for a Re 1 face value share was Rs 80.34.

Compare this with Hatsun Agro Products, which split the face value of shares recently to Re 2 from Rs 10. The number of shares traded on BSE on Friday was just 2,475 and the share closed at Rs 84. IBN18 Broadcast Ltd, which recently split the face value of shares to Rs 2 from Rs 10 “in order to improve liquidity of the company’s equity shares on the stock exchanges and to make it more attractive for participation by small and retail investors”, saw just 1,197 shares traded on Friday with the share closing at Rs 98.85. This is not surprising given its performance and the fact that the floating stock is low with promoters/employees/private corporate bodies and so on holding almost 89 per cent of the shareholding.

For the Coimbatore-based companies, low price and low share face value (Re 1) have not helped in increasing trading volume.

Buying on Fundamentals

Mr Hitesh Agrawal, Head - Research, Angel Broking, Mumbai, said the prime reason for a stock split is to “increase the liquidity, affordability and appeal for retail investors”. But it “does not alter the fundamentals of the company in any manner”. Hence the buying decision should primarily be based on this factor and not on stock splits. He felt that “as far as 50 per cent public holding in a company is concerned, it can be termed as good liquidity in the stock”.

On the factors responsible for the great stock-split stories in the past such as HDFC, ITC, Hero Honda, ACC, HLL and software majors such as Infosys, Wipro and Satyam, he said the biggest reason for investors making profit in these companies “was the good financial performance” managed by them year after year. He believed that in the long term most of these companies would continue to deliver handsome profits but “to expect a repeat of the past performance (last 3-4 years) would not be appropriate”.

On what would be a better way of increasing liquidity rather than lowering share price, he said, “improvement in financial performance is of utmost importance.

Post-split factors

Mr K. Annamalai, former President, Coimbatore Stock Exchange and Director, DJS Stock and Shares Ltd, said while the concept of stock split was very popular in the West, in India this gained currency only from early this decade. He said investors had made handsome gains from stock splits in the past as the post-split trading price of shares was higher than the proportionate split value, a phenomenon that is witnessed after a stock goes ex-bonus. He said factors like the earning per share (EPS), P/E ratio and consistent performance ensure high volume of trading on a sustained basis. For trading volume to remain high, these counters should also be able to attract the interest of institutional investors and speculative traders.

Mr Annamalai said post-split, many shares see the trading volume shrink, leading to a huge gap between the buy and sell quotes. Investors entering such counters face a double whammy — they pay a higher price while acquiring the stocks and find it difficult to offload them because of thin trading.