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Hindustan Lever leads the way

Aravamuthan Sasikant

Stock splits seem to have become the order of the day. Wipro, Zee and Infosys have already gone ex-split last year. Now it's the turn of multinationals going in for stock splits led by Hindustan Lever. Yesterday, Lever went ex-split in the ratio of 10:1. Three other multinationals - Abbott Laboratories, Widia and Cummins - have declared a stock split or will declare one shortly. And there will be more multinationals coming out with stock splits.

Stock splits (see Tutorials on stock splits) are not bonus issues as they do not increase the equity capital in any way. They also don't serve any other purpose either for the company or the shareholder. What stock splits do is increase the number of shares thereby increasing the float in the market. They reduce the price per share making it more attractive in absolute value terms. Improved liquidity attracts speculators, traders and investors alike.

Hindustan Lever has split in the ratio of ten for one. If a shareholder had 100 shares of a face value of Rs 10 earlier, he will have 1000 shares of Re 1 each now. This has resulted in the per share value going down from Rs 2800 (Rs 10 face value) to Rs 280 (Re 1 face value).

The average trading volumes in Wipro have gone up more than five times after its five for one split in September 1999. There could also be some price appreciation before and after the company goes ex-split as the participation can increase.

With these four multinationals leading the way, one can expect many more MNCs to go in for a stock split. Many of these companies are quoting at high prices of over Rs 500. Liquidity in most of these stocks is poor as there is little floating stock. In most of the case the parent itself holds between 51 per cent and 74 per cent of the stock.

In most of these cases, mutual funds and institutions also have a substantial holding which further reduces the floating stock. For example, Rhone Poulenc has a daily average trading volume of less than 4,000 shares on an outstanding capital of 4.5 million shares, Indian Shaving Products also has daily average trading volumes of less than 4,000 shares on total outstanding shares of 12.8 million shares.

Multinationals are also comfortable with stock splits as it is happens in the foreign markets. The experience of companies that have gone for a stock split has so far been good. ACC, Wipro, Infosys and Zee Telefilms have all seen liquidity in their stock increasing significantly after the stock split. It is highly probable that the shareholder value conscious managements whose stocks have poor liquidity will go in for a stock split.

The likely candidates that can go in for stock splits are foreign pharma companies like Knoll Pharma, E Merck, Burroughs Wellcome, Hoechst Marion, Rhone Poulenc, Pfizer and German Remedies, or fast moving consumer goods companies like SmithKline Beecham Consumer, Cadbury, Indian Shaving Products and Procter & Gamble. In engineering, there could be companies like MICO, Sandvik Asia and Atlas Copco. Other companies like Hind Lever Chemicals and Thomas Cook also suffer a low floating stock.

For an investor, identifying possible stock split candidates can result in making some decent money. The risk is also lower as many of these companies are doing well and the management quality is also excellent.

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