But wide difference in fundamentals of the two

Two companies have came out with stock split announcements that would make their stock prices look cheaper, paving the way for more liquidity in these counters.

This should in normal course look as an investor-friendly move since this helped more investors — particularly small investors — to get into the stock investment mode. And hence they would be welcome, so would be the usual argument.

But there is a difference between the two companies: Axis Bank has a sterling performance to back the stock price and Swadeshi Industries & Leasing Ltd had nil sales during the financial year ending March 2013 and reported nil sales in the first nine months of the current fiscal.

Axis Bank, which came out with its Q4 and FY 2013-14 results today, also made a surprise announcement of sub-division of face value of its shares from ₹10 into five shares of ₹ 2 each. The stock has more than doubled in the past seven months — from a low of ₹764 that it touched in Sept last year to ₹1534.45, its BSE closing price, today.

The decision to sub-divide the share face value, at today’s price, would make the stock available theoretically at ₹306 at its proposed face value of ₹2, making the stock more affordable that may lead to higher trading volume, particularly at the retail end. It is true that the fundamentals of the bank stock will not change because of the stock split, immediately and it did not add any fresh value.

However, over a period this helps in creating investor wealth because fundamentally strong companies, because of their continued performance, add value to the stocks which in turn enhance investor wealth.

There are innumerable examples of this, including from banking sector itself such as HDFC Bank, apart from Hero Motocorp, HDFC, Tata Motors etc, to name only a few.

Compare this with Swadeshi Industries & Leasing Ltd. The company’s board had on Thursday approved to split the face value of its shares from ₹10 ₹1. The stock closed on Friday at ₹394, down ₹6 with a trading volume of 8,064 shares. The holding of the promoter in the company is just 28.48 per cent.

The surprising thing was the share performance in relation to the company’s financial performance. Despite the investor education programmes organised by the stock exchanges, that shares of such companies are trading at a huge valuation shows that either these programmes are not reaching the targeted audience or investors are still being naïve!

(This article was published on April 25, 2014)
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