The ongoing correction in the Indian stock market has left many retail investors wondering about the reasons behind the heavy selling. While the Middle East war is an important factor here, the relatively expensive valuations of the Indian firms, downbeat Q2 results, and a slowing Indian economy are other reasons.

Foreign institutional investors (FIIs), who are the most fickle players in a stock market, have according to Trendlyne’s FII & DII dashboard, sold over Rs 90,000 crore worth of equities in the Indian market in October (the highest ever in a single month). This suggests that FIIs are booking profits and reallocating some investments to China, which currently appears to be a more affordable market. As a result, the Nifty50 is trading at a discount of over 7% from its all-time high. Even promoters, who are closely tracked for their long-term bets on their companies, have been cashing out a sizeable chunk of their holdings.

This chart of the week takes a look at promoter activity over the past quarter. Given promoters' significant influence over board selection and key decisions, their trading activity can be a leading indicator that gives insights into the future of the business. According to Trendlyne’s shareholding stock screeners, promoters of 155 of the top 500 firms have reduced their shareholding, while just 23 increased it over the past quarter.

Stocks with expensive PEs see corrections, promoters selling stakes

Many stocks trading at very high price-to-earnings (PE) ratios or with a Trendlyne valuation score of below 35 have seen significant correction over the past month. An easy-to-understand value metric tracked on Trendlyne is the percentage of days the stock has traded below the current PE ratio. If this is more than 80%, it indicates that the stock usually trades below its current PE and is at a relatively high valuation, or in the “Strong Sell Zone”. This could explain why promoters are cutting their stake.

Out of the 155 stocks where promoters decreased their stake in the last quarter, 93, or 60%, are in the Sell Zone or Strong Sell Zone. Firms like Prestige Estates Project, Vedanta, Max Financial Services, KPR Mill, and Adani Energy Solutions are in the Strong Sell Zone. Meanwhile, JK Tyre & Industries, Welspun Living, Patanjali Foods and 33 other firms are in the Sell Zone — which means that stock has traded below the current PE for at least 60% of the days.

Notable sells by promoters

According to a Trendlyne screener that tracks promoter stake cuts of over 2% in Nifty500 firms, 31 companies have witnessed significant promoter selling over the past quarter. Companies appearing in this screener include GE T&D India, Easy Trip Planners, Route Mobile, Sterling and Wilson Renewable Energy, InterGlobe Aviation and Adani Energy Solutions among others.

GE T&D India, an industrial machinery firm, saw its promoter offload a 15.6% stake via an offer for sale priced at Rs 1,400 per share — around Rs 300 below the then trading price. This resulted in stock hitting a lower circuit of 5% the day the offer opened for subscription on September 19.

Meanwhile, Easy Trip Planners’ promoter, Nishant Pitti sold half of his stake in the past quarter and currently holds only 14.2%. This has reduced the cumulative promoter holding from 64.3% a quarter ago to slightly above 50% as of September 2024. The stock currently trades at nearly half its 52-week high of Rs 54.

Similarly, at the end of August 2024, Rakesh Gangwal, co-founder and promoter of airline operator, InterGlobe Aviation (Indigo), sold a 6% equity stake valued at over Rs 10,000 crore. The Gangwal-backed promoter group’s stake has dropped from 36.7% in 2019 to 13.5% as of September 2024. This includes the 8.2% stake of Chinkerpoo Family Trust – whose trustees are Shobha Gangwal and JPMorgan Trust Company of Delaware – and Rakesh Gangwal's personal 5.3% stake.

This all started when the partnership between co-founders Rahul Bhatia and Rakesh Gangwal soured and fell apart in 2019. In February 2022, Gangwal resigned from IndiGo’s board as a non-executive, non-independent director and announced plans to reduce his stake. “I have been a shareholder in the company for more than 15 years, and it's only natural to someday think about diversifying one's holdings,” Gangwal explained in his resignation letter.

Significant corrections have led to stake additions

With the ongoing correction in the Indian stock market, many stocks are trading at a substantial discount from their all-time highs. Promoters are taking this as an opportunity to increase their stakes, though the list of buyers is notably shorter compared to the number of sellers.

While major promoter sells often make news headlines, however, the case is not the same when they increase their stake. This is likely because they don’t want to drive up the price while they are stacking up on those shares. Trendlyne’s screener, however, constantly tracks these activities and currently highlights over 20 stocks where promoters have increased their holdings over the past quarter.

For instance, Maharashtra Seamless, a steel pipe manufacturer, saw its promoter, Jindal Group, add around 2.5 lakh shares year-till-date in 2024. Trendlyne categorises this stock as a “Value Stock, Under Radar”, noting the company’s sound financials, with the stock currently trading at a discount of over 40% from its all-time high.

Similarly, Adani Green Energy, an Adani-Group firm, witnessed stake additions over the past two quarters as the stock currently trades at a discount of around 25% from its 52-week high. Other notable companies where promoters increased their stake over the last quarter include Indus Towers, GMR Airports Infrastructure, and Kalyan Jewellers India, among others.