Companies that split stocks make smart gains in the market

The markets have spiralled since January this year and small-cap stocks have fared even better. But there’s a small set of stocks that have offered especially rich pickings for investors: companies that announced stock splits.

Of the 38 companies that have split their stock so far this year, 26 have gained since the announcement. Half of them have jumped over 20 per cent if held till date.

Premier Capital Services, Greencrest Financials, JBM Auto, Rekvina Laboratories, Cubical Financial Services, Alkyl Amines and Orosil Smith are stocks that have gained more than 100 per cent since the split announcement. Atul Auto, Astral Poly Technik, La Opala RG and Gujarat Automotive Gears are among those that have gained 30-70 per cent since the announcement.

Stock splits are corporate actions where a company decides to increase the number of shares without raising fresh capital. The face value of each share falls. This makes the shares of a company cheaper in the market and draws more investors to it.

This year, with the rising market taking many individual stocks to new highs, the market has been abuzz with stock splits. A split readjusts the price and improves liquidity in the stock.

“Stock splits are frequently considered when the company’s stock price has risen to a level that management feels is out of the popular trading range. At that point, it ceases to be a frequently traded stock and is generally traded only by high net-worth investors and institutions. This impacts liquidity,” explains Rahul Shah, Vice-President, Equity Advisory Group, Motilal Oswal Securities.

From January this year, 72 companies have announced stock splits, of which 38 have already given effect to the split. In the 2009-10 market boom, 151 companies had announced stock splits.

Party only for small caps Stock splits have been particularly popular with companies with small market capitalisation, probably because they are keen to attract investor interest. Of the 72 companies that announced a split, 55 had market capitalisation of less than ₹2,000 crore. Most of the 100 per cent gainers are from this space, too.

A handful of larger companies that also split their stocks this year weren’t lapped up with similar enthusiasm. Havells India and Axis Bank, for instance, have gained 13 per cent and 23 per cent, respectively, till date, after their announcements. Both stocks rose before the split took effect but pared gains immediately after the event.

Banks to the fore In total, seven large-cap companies have announced stock splits this year. Most are yet to announce the record date for the split. Of these, six are banking stocks: SBI, ICICI Bank, Axis Bank, Bank of Baroda, Punjab National Bank and Canara Bank.

Bank stocks have been frontrunners in this rally and had moved to four-figure stock prices. Splits have been announced to drive retail interest, with many yet to set a record date. Banks that have announced stock splits have seen their prices rally by 35-45 per cent.

“When the stock price touches ₹1,000, the retail investor is reluctant to buy. Hencem we decided to go for a stock split of 10:2 to attract the retail investor,” says KR Kamath, CMD of Punjab National Bank.

The PNB stock rallied 54 per cent between January and September, when the split was announced.

The stock price has moved up from the ₹600 level to about ₹1,000 now, with the record date yet to be announced.

The same has been the case with SBI, BoB and ICICI Bank, which are trading in the ₹900-2,500 range.

A word of caution But not all stock splits are driven by such rationale. Because much of the stock split excitement has been in small-cap stocks, investors need to be wary, and consider the fundamentals of the company before investing, warn experts.

Investors should not jump the gun and invest in a stock only to cash in on a split. Short-term rallies may fail to sustain over a longer time, they say.

Of the 72 companies that announced a stock split this year, about a fifth traded below ₹100 when they announced the split.

“The most important thing before investing is to understand the rationale behind the split. Sometimes companies may just want to shore up the stock price with the help of operators,” says Rahul Shah from Motilal Oswal Securities.

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