Informist, Monday, Jul 10, 2023
By Padmini Dhruvaraj
MUMBAI – Block deals in the Indian equity market have surged in recent weeks as promoters, private equity investors, and other large shareholders are rushing to take advantage of the bull run by selling shares at rich valuations. However, if history were anything to go by, the trend of high number of such block deals is an indicator that the stock market has reached a peak and is likely to correct soon.
A large deal between two predefined parties having a minimum order value of 100 mln rupees is defined as a block deal. Such deals, generally arranged by investment banks, happen during the specific trading windows allocated by stock exchanges.
Analysts, Too, Pointed Out That A Higher Number Of Such Large Deals Is an Indication That The Market Has Either Reached Its Peak Or Is Approaching It.
The Nifty 50 has fallen at least five times since 2021 each time such block deals by promoters or prominent shareholders have surged, according to a compilation of data on block deals sourced through National Stock Exchange.
Granted, the reasons for the correction in shares could have been different, but there is some causality between the two, according to market experts.
For instance, the number of block deals had increased to 208 during the first fortnight of October 2021, against 20 such deals in September 2021. Soon after, the Nifty 50 hit its then all-time high of 18604.45 points on Oct 16, 2021 and then the index fell close to 4% in November 2021.
Since then, nearly all the times the index has crossed 18000 points level, the number of block deals has risen and the index has declined soon after hitting a fresh lifetime high.
In 2022, when the Nifty 50 scaled new highs in April, September, and December, the 3-8% correction that followed was preceded by a massive jump in such block deals.
Cut to present, as many as 367 block deals took place in June on the National Stock Exchange against a mere eight such deals in May. The number of bulk deals also rose to 1,472 in June from 917 in May.
"Block and bulk deals are very stock specific, but it is true that the activity has increased in the last two-three weeks as the institutional activities have increased, and that normally happens during the top formation," said Viraj Vyas, a technician and derivatives analyst at Ashika Group.
The benchmark Nifty 50 and Sensex scaled fresh lifetime highs of 19523.60 points and 65898.98 points on Friday. The 50-stock index gained 3.5% in June, while the Nifty Mid Cap 50 and Nifty Small Cap 50 rose 6.2% and 5.9%, respectively.
"You need demand for stocks for these deals to happen, and right now since the market is doing well, there is enough demand from the institutional side," said Nishit Master, a fund manager at Axis Securities Ltd.
"Private equity players, promoters who are selling these are essentially getting a good price. Those who are suppliers are mostly insiders, like board members, who think they are getting a fairly good valuation," he added.
Analysts, too, pointed out that a higher number of such large deals is an indication that the market has either reached its peak or is approaching it.
"Why will promoters sell their stakes if they think their stocks will move higher?” questioned Nirav Harish Chheda, assistant vice-president of derivatives and technical research at brokerage Nirmal Bang Institutional Equities.
Therefore, "Whenever block deals rise, we should be worried, as it signifies that the top is near," he added.
However, not all experts believe in the correlation.
"Timing the market is impossible, if someone wants to be invested in the market then one has to hold onto their positions longer," said Master. It is "not necessary the index will fall after a heavy flow of these (block and bulk) deals, and with the flows coming in, you never know," he added.
Vinit Bolinjkar, head of research at Ventura Securities, said, "Selling will be there at every level as some people always think the market is expensive or is getting expensive, and deals keep happening every now and then. But this won't hold back the index from scaling new highs."
Foreign investors have turned into net buyers in the Indian equity market in the past three months. The shift can be attributed to factors such as cooling domestic inflation and better growth potential of the Indian economy in comparison to other countries.
In June, foreign portfolio investors pumped 471.5 bln rupees into Indian equities, making it the highest inflow in 10 months. So far in July, FIIs have been net buyers in the cash market and have bought shares worth 57.33 bln rupees.
However, these inflows could taper off due to the worry that corporate earnings growth may not catch up with growing valuation multiples of stocks, some analysts said.
The buy-on-dips rally in Indian equities is largely expected to continue this month, with the Nifty 50 facing resistance at around 19500 points, and then at 19800 points, according to the result of a recent poll of 16 brokerage houses conducted by Informist. The index will find strong support near levels of 18800-18900, the poll showed.
Today, the Nifty 50 and the Sensex closed 0.1% higher each at 19355.90 points and 65344.17 points, respectively. End
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