This famous quote by investment guru Warren Buffett on stock-picking looks to be driving retail investor participation in India’s stock markets. And, going by the shareholding disclosures for March 2023 quarter, many individual investors seem to have come up with their own stock-picking strategy: companies that are either dirt cheap or plain heavyweights.
The data, released by Capitaline and BSE recently, provides an interesting insight into retail investor behaviour. And the darlings of these investors: Yes Bank, Tata Power, Tata Motors, Reliance Industries Ltd (RIL), Reliance Power and State Bank of India (SBI). Between them, these companies have a total of 26 million retail shareholders.
Beaten-down stocks
Yes Bank has the highest number of retail shareholders (4.97 million), followed by two Tata group companies and the others. The Yes Bank stock, though, delivered negative 45% compound annual growth rate (CAGR) returns during fiscal years 2018-23. Surprisingly, the lender saw a sharp surge in the number of retail shareholders between fiscal 2020 and 2023 when its stock got hammered after the Reserve Bank of India imposed on it a 30-day moratorium.
Similar is the case with some of the other stocks. For instance, the number of retail shareholders in Adani Power stood at 549,000 as of FY2021 but it more than doubled to 1.76 million as of FY2023. At Adani Ports, their numbers jumped from 390,000 in FY2021 to 1.07 million in FY2023. IDFC First Bank saw the numbers swell from 1.14 million in FY2021 to 1.65 million in FY2023. Telecom firm MTNL’s case is even more compelling. While its market share in the telecom sector nosedived, the number of shareholders surged from 153,459 in FY2021 to 180,512 in FY2023. JP Power, another beaten down stock, saw retail investor numbers skyrocket from 360,000 in FY2021 to 1.44 million in FY2023
All these numbers point to the voracious appetite of retail investors for beaten-down stocks—scrips that have seen a sharp correction and the stock price has crashed to double- or even single-digits. For instance, Yes Bank’s stock is currently trading at ₹16 per share, falling from a lifetime high of ₹404 in FY2019.
So, what makes retail investors invest in these stocks. “Retail investors look at low-priced stocks with expectations of seeing a turnaround some time later. They also often miscalculate that there is hardly any more room for a downside after the stock has taken a heavy drubbing,” says G. Chokkalingam, founder of Equinomics Research & Advisory.
“Besides, since the prices are cheap, they can buy a larger number of the shares,” he adds. For instance, an individual who wants to invest ₹1 lakh can buy 1,000 shares of a company at ₹100 apiece but can buy double this number if the price is ₹50 a share and then hope to make a sizeable profit when the prices soar.
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Business groups
It is not just beaten-down stocks that are popular with retail investors. The heavyweights, or well-known business groups, also tend to see large retail shareholder participation. A case in point: RIL, SBI and Tata Power are among those with the highest number of such shareholders. RIL has also been a perpetual favourite of retail shareholders. The stock has delivered CAGR returns of 20.9% over FY18-FY23.
While SBI has a strong brand recall value as being one of India’s oldest banks with the country’s largest branch network, Tata Motors and Tata Power have benefitted from the recent push for electric vehicles (EVs) by the government, the expansion of charging stations for such vehicles and an increasing interest in the EV sector by the broader market.
All three of these stocks have delivered 11.6%, 1.9% and 15% CAGR returns, respectively, during FY18-FY23. Only RIL and Tata Power have managed to outperform the S&P BSE Sensex, which delivered a CAGR of 12% returns during the same period.
Besides the popular heavyweights, individual shareholders have shown a liking for beaten-down stocks of companies that are part of any conglomerate. Deepak Jasani, head of retail research at HDFC Securities says, “Retail investors tend to buy beaten-down stocks of companies run by business groups on hopes that adequate measures will be taken to unlock value. That is the reason why there is heightened activity in terms of trading volumes and number of shareholders. Expectations of positive corporate action also act as magnets for higher participation of retail investors.”
For example, Reliance Power of the debt-ridden Anil Ambani group has 3.5 million retail shareholders. The stock delivered CAGR returns of -26.8% over FY18-FY23.
While the brand value of Reliance and Tatas have made them popular among investors, the cheap prices of Yes Bank and Reliance Power have piqued interest of retail investors.
Shrikant Chouhan, head of equity research, Kotak Securities, says “It is observed that whenever any large-cap company is impacted by specific news alerts (particularly where it concerns corporate governance issues), FIIs and DIIs try to exit 100% and liquidate that holding in the open market. But retailers rush in with the hopes of exiting with quick profits. However, most of the time they get caught on the wrong foot.” FIIs is short for foreign institutional investors and DIIs is the acronym for domestic institutional investors.
What investors say
Hyderabad resident Khushal Sethia, 22, says he invested in Reliance Power in 2018 on the suggestion of his friends. He claims to have made a 50% profit on the stock and freed his capital while the rest is still invested in it.
Hiten Doshi, 24, a resident of Pune, says he invested in RIL due to its strong brand and a lot of M&A (mergers and acquisitions) deals being done by the company. He didn’t know much about the fundamentals of the stock, but was betting on RIL chairman and managing director Mukesh Ambani and the firm’s success story.
Rhythm Sharma, 23, says he invested in SBI, Tata Motors and Yes Bank. SBI is a trusted brand and the stock was available cheaply. As for Tata Motors, the Pune resident says, the firm was the first to move in the EV space and ace investor Rakesh Jhunjhunwala had also invested in it. Sharma claims that he invested a small amount in Yes Bank because of the cheap stock price.
What to watch out for
Investors should take note of the returns from these stocks and compare them with market benchmark S&P BSE Sensex. They can lose their investment capital if the beaten-down stocks continue to touch new lows even after a correction. Betting on a company turnaround is like timing the market. And this can be very risky.
“The absolute price of a stock doesn’t make it cheap. It is the valuation which qualifies a stock as cheap or not. Interestingly, over two-third of stocks which eventually get suspended from stock exchanges were trading very cheap in absolute terms,” Chokkalingam says.
Therefore, one must understand the risks and returns given by these stocks over the longer period before investing in them. Many of these stocks are simply popular because of their dirt cheap prices. Investing directly in equity is not easy. Getting into stocks just because of their low prices, instead of focusing on their fundamentals, can backfire if the expected turnaround never happens.