Significant action before ex-split date

The announcement of a stock-split is typically followed by sharp spurts in the company's share price. Usually, there is an average time-frame of about two weeks between the time of the stock-split announcement and the record date for the stock-split.

During this period, a majority of the stocks on which stock-splits were announced witnessed strong appreciation.

The returns on mid-cap stocks have, typically, been higher in this period than those on large-cap stocks, as the prospect of higher liquidity can lead to better valuations.

However, stocks that witnessed spectacular gains in this period are mostly those that have an obscure background. Any gains that these stocks make before the stock-split evaporate within a month from the day they go ex-split.

A few companies with good fundamentals that appreciated smartly include Shanthi Gears, Adani Exports, Gammon India, Bayer CropScience, Nicholas Piramal and Bajaj Hindusthan. The gains accrued ranged between 10 per cent and 35 per cent, between the announcement and the record date.

About 70 per cent of the stocks appreciated in the two weeks before they went ex-split.

This suggests that investors may benefit from entering a stock immediately after the announcement of a stock-split, in the case of fundamentally good companies.

However, there have been exceptions. Stocks such as Glenmark Pharmaceuticals, Sundram Fasteners, Hindustan Sanitaryware and Aurobindo Pharma declined in the weeks before the stock-split. It is likely that, given their sharp run-up in earlier months, investors took the opportunity to book profits in the run-up to the ex-split date.

Short-term trading returns

Even if you missed the action right after the announcement, had you bought the stock the day just before it went ex-split, you would have made a tidy sum the day after the split stock began trading. Say there is a ten-to-one stock-split, and a stock trades at Rs 100. On the day the split takes effect, the stock should trade at Rs 10. In seventy per cent of the cases, however, the stock settles at a higher level than this theoretical price.

Bayer CropScience, for instance, traded at Rs 2001 the day before it went ex-split. On announcing a ten-to-one stock-split, it should have, theoretically, traded at Rs 200.1 on the day it turned ex-split.

Instead, it closed ten per cent higher at Rs 220.10. Stocks such as Bayer CropScience, Amtek Auto, Sona Koyo Steering, Glenmark Pharmaceuticals and Nicholas Piramal were also among those that settled at higher prices.

In some of the more recent stock-splits, though, stocks have settled slightly below the theoretical price. Balrampur Chini and Hexaware Technologies are examples. Aurobindo Pharma, MICO and Carborundum also settled at lower levels in the past.

These significant returns, in any case, appear rather fleeting.

Few stocks have been able to sustain the gains accrued on going ex-split in subsequent months. Within three months of going ex-split, more than half of the stocks lost value.

Stocks that continue to trade higher include Shanthi Gears, Amtek Auto, Sona Koyo Steering, Indian Hume Pipe, Pricol, Madras Cements and Berger Paints.

Enhanced liquidity, affordability drive gains

Stock-splits have managed to enhance liquidity for a majority of the stocks. For companies such as Shanthi Gears, Motherson Sumi, Berger Paints, Bajaj Hindusthan, Carborundum Universal and Sundram Fasteners, there has been a sizeable spurt in traded volumes (after adjusting for the effect of the split) compared to their pre-split days.

A culmination of factors — better performances, mid-cap interest and higher liquidity by way of stock-splits — appear to have boosted the volumes of these stocks.

Stocks such as MICO, Bayer CropScience, Madras Cement and Sundram Fasteners, which had a face value of Rs 100, have witnessed higher trading volumes after a ten-to-one stock-split.

MICO, which traded at about Rs 13,000 before it turned ex-split, became far more affordable post-split. Mercator Lines, Cipla, Nicholas Piramal, Adani Exports and Ashok Leyland are also among those that have attracted more investors post split, their share prices being more affordable.

A few cases where stock-splits have not helped improve liquidity, despite improving fundamentals include Sun Pharmaceuticals and Sona Koyo Steering.

Investments based on stock-splits

Should you invest in a stock before or after it goes ex-split? If you are looking for short-term gains, you could consider buying a stock on announcement of its split. But you would have to exit the stock quickly or you run the risk of seeing your gains evaporate, particularly where the stock lacks sound fundamentals.

You could choose to invest in certain companies post stock-split as well, although stock selection would play a greater role in such a case. Picking stocks that were infrequently traded before a split but otherwise fundamentally sound, may be a smart strategy.

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