MNCs selling stake is a very important signal: 3P Investment's Prashant Jain

The former chief investment officer of HDFC AMC discusses why promoters and MNCs could be reducing stake in companies they own and what it means for retail investors

By Neha Bothra Forbes India Staff

Published: Jul 4, 2024 04:05:58 PM IST

Updated: Jul 4, 2024 04:13:02 PM IST

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Prashant Jain, CIO and fund manager, 3P Investment Managers Image: Neha Mithbawkar for Forbes India

Promoters of domestic companies have diluted stake to the tune of $10.5 billion in the first half of the current calendar year. This is the highest in five years and is expected to cross $12.4 billion in the coming months. As per data on stock exchanges, the promoters of 37 listed companies offloaded shares owned by them to domestic and foreign institutional investors.

A higher share ownership signals the confidence of the promoter group in the company. But the reasons for selling shares also varies. For example, the promoters of Mankind reduced their shareholding in the company to comply with minimum public shareholding norms stipulated by markets regulator Sebi (Securities and Exchange Board of India). Similarly, Vedanta said it was paring its stake to repay debt. However, for pharmaceutical company Cipla, the promoters sold shares for philanthropy.

But a noteworthy trend stands out for market veteran Prashant Jain, CIO and fund manager, 3P Investment Managers: The pace of stake sale by MNCs in their India arm. “This has never happened; I don't think we have ever seen this before,” says the former CIO of HDFC AMC and its longest serving fund manager of assets under management to the tune of Rs1 lakh crore.

In an hour-long conversation, Jain discusses core investment strategies for investing in current times and delves deeper into the dominant themes playing out in the market and the economy. In part one of the interview, we dissect the rising prevalence of promoters cashing-out partially. “The primary driver I feel is valuations,” he adds. Edited excerpts:

Q. Why are promoters reducing stake in companies they own?

The primary driver I feel is valuations. Because at these levels, probably promoters find that the valuations are quite appropriate for them to reduce their stakes. I think maybe the markets are more optimistic on these businesses than what the promoters believe; that could be one possibility. But something that we have not seen earlier is the MNCs selling stake in domestic companies. So, companies like Timken, Whirlpool… they're selling stakes in Indian arms, which are doing exceedingly well, have good prospects, but they have sold because they are very expensive, so MNCs are selling stakes, if they can sell then…. so, that is one part.

Apart from that, we have also seen that in many promoter families, as the families are growing, businesses are going to the second or the third generation. It is also no more a taboo for the next generation to do something else on their own. So, I think they are also taking a more, I would not say pragmatic, but a different approach, wherein at least a part of the family wealth you want to de-risk rather than confine all your wealth in the family business. So, I think that kind of selling is also taking place.

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In a few cases, we're also seeing PE-funded companies where the promoter stake is actually quite low… so, it is quite understandable if that group of promoters also wants to sell. Because these are not controlling stakes, these are not large stakes. So, in five to 10 years, at some point of time, they are likely to transition to just being an investor in these companies. All the more reason for them to de-risk your personal or family’s wealth.

MNCs selling stakes is a very important signal. See, because these are genuine promoters. There is no family. They will continue to own these businesses for decades. So, when an MNC sells 10 to 20 percent stake in its India arm, which is growing extremely well, it is telling you that despite strategic intent and that company being important to them… they’re still selling. So, I think, they (investors) have to be cautious. This (kind of selling by MNCs) has never happened. I don't think we have ever seen this before.

Q. Is that a show of lack of confidence in India in the coming years?

No. It is not a lack of confidence in India. They are retaining their majority stakes. They are investing more in the business simultaneously, but they find the businesses to probably, we are guessing, be sharply overvalued. That’s why they think it’s a pragmatic move. When you start trading at 100 P/E it is (tempting)… even if the business grows 5x, you are still at 20.

Q. What should the retail investor learn and be cautious about in such a market scenario?

I think every cycle has told us… what is happening is not new. We have seen very similar situations in the early 90s, and a very similar situation in early 2000. Whenever valuations become excessive, the longer-term returns are much lower, especially in the pockets which were sharply overvalued. So, I think we are in one such similar situation. And that's why we are optimistic on the market, we are not pessimistic. We think markets will grow. But the pace of returns is likely to be, I would say, low double digits. Certain pockets are becoming excessively valued in the small- and medium-sized companies and in manufacturing.