Mumbai: Three days after three large US financial institutions roiled global markets with simultaneous woes, investors continue to punish Indian stocks held by these firms.
The Indian equity portfolio of investment bank Lehman Brothers Holdings Inc. saw the worst fall, shrinking by 11.5% in value compared with the 5.27% decrease in the Sensex, India’s most tracked benchmark index, in the same period. In comparison, Merrill Lynch and Co.’s holdings have fallen by 7.2% and those of insurer American International Group Inc. (AIG) almost mirrored the fall of the Sensex.
Merrill holds 132 stocks in its portfolio compared with 18 by Lehman and just eight by AIG. At close on Wednesday, Merrill had the largest exposure—of Rs9,781 crore, followed by Lehman with Rs377.5 crore and AIG with Rs193.3 crore. The list of these stocks was obtained from Capitaline, and include only those companies where these investors hold more than 1%, and are freely tradeable.
On Monday, Lehman Brothers filed for Chapter 11 bankruptcy proceedings in the US after it failed to find a white knight to save it from the $60 billion (Rs277,800 crore) of exposure to souring mortgage-related securities.
Merrill Lynch sold itself to Bank of America Corp. for $50 billion to escape a similar fate while the US government injected about $85 billion in AIG in return for an almost 80% stake in the beleaguered insurance giant.
“The market will view their (Merrill, Lehman, AIG) holdings with a certain amount of suspicion,” said Ajay Pandey, assistant vice-president of institutional business at Systematix Shares and Stock India Ltd, a Mumbai-based brokerage. “Though there will not be any immediate sell-off, in a low-volume market, prices could drastically come down if one of these large investors decides to sell.”
According to Pandey, this is especially true for mid- and small-cap companies to which these three global giants have exposure, where liquidity tends to be low and promoters do not have enough financial muscle to buy the shares from these investors.
Crash Course (Graphic)
An example of such a kind of stock would be Poddar Developers Ltd, where Merrill Lynch had a near-6% holding. The stock has seen its value fall by nearly 62% since Friday, the most among the holdings of these companies.
Deepak Jasani, head of retail research at HDFC Securities Ltd, said investors should consider three factors when deciding to buy into companies where these financial institutions have an exposure: the size of their holdings, whether the company is widely traded and whether the holder is being liquidated or being acquired.
“If the institution is getting liquidated, the worry about a sell-off is real and near,” Jasani said.
For instance, Intellivisions Software Ltd, where Merrill holds a 10% stake, fell 14.41% in the period under review. Similarly, Lehman’s 4.82% holding in Orbit Corp. Ltd had shrunk by 21% in value.
Further, there are certain companies in which the existing investor needs to be locked in for a period. “In such instances, there may not be immediate sell-offs, but long-term investors could stay away from such stocks fearing a sell-off at some point in the future,” said Jasani. For example, Lehman Brothers holds a 28.4% stake in KSK Energy Ventures Ltd. Though the stake is sizeable, Lehman is locked in till July 2009, which will prevent any immediate sell-off.