Companies with $465 billion in combined market cap to see a CEO change in the next 12 months: Here’s what investors should do

• Several large companies with a combined market capitalisation of $465 billion are all set to see a leadership change over the next 12 months, including SBI, TCS and HUL.
  
• Leadership changes can result in a change in the company’s strategies and thereby, its stock performance.
  
• An analysis of these leadership changes on the stock price of companies has now been quantified, with some very interesting outcomes.
  

Leadership changes in large companies can be pivotal, and often lead to the ushering in of new ideas, culture and values. These changes can also impact the performance of a company and by extension, its share price as investors realign their investments in line with changes in the company’s strategy, if any.

Several large companies in India are in que for a leadership change in the next 12 months, with their combined market capitalisation amounting to $465 billion. This is 21% of the benchmark Nifty50 index’s cumulative market capitalisation and 17% of the total foreign institutional investor holdings.

The list includes some large players like the State Bank of India, Hindustan Unilever, TCS, Kotak Mahindra Bank and HDFC, among others. While changing macroeconomic situations have driven some of the leadership changes in some cases, in other instances the changes are due to the expiry of the terms of existing CEOs.

Now, analysts at Jefferies have tried to quantify the impact of these leadership changes on investor confidence, tracking the stock performance across 72 companies. The results have an interesting story to tell.

Outperforming stocks continued to do well post leadership changes, too

Market sentiments remained positive for companies which were seeing stock outperformance in the six months leading up to the CEO change – according to Jefferies, out of the 26 stocks which were outperforming prior to the changes, 16 continued to do well even after the leadership change.

Overall, sentiments improved notably after bringing in new leadership – the total number of outperformers increased from 26 to 38, while the number of stocks underperforming fell from 45 to 34.

Internal hires better for more companies

More companies benefited from hiring CEOs internally than externally. According to Jefferies’ data, nearly 57% companies’ stocks outperformed in the first six months of elevating an existing executive as the CEO, while this number was down to just 50% for external CEO hires.

Even in the six months prior to the leadership change, more companies which hired a CEO internally benefited than those which hired an external CEO – at 40% versus 32%.

Mid and small-cap companies tend to hire more CEOs externally

Mid and small-cap companies have tended to hire more CEOs externally than their large-cap counterparts, pointing at the fact that large-cap companies have a better talent pool at the highest level.

According to the report, 55% mid and small-cap companies hired external CEOs, while only 40% large-cap companies sought an external talent to lead them.

Best and worst performers

Amongst the companies which witnessed a huge swing from their performance six months before and six months after the CEO change are Tata Motors (post the CEO change at British subsidiary Jaguar Land Rover), JK Lakshmi Cement, IDFC, Tata Elxsi, HDFC Bank and Ambuja Cement.


Source: Jefferies

Overall, only 28 companies witnessed a delta of less than 10% between these two periods.

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