May 27 (Bloomberg) -- Grupo Lala SAB, Mexico’s largest milk producer, may win entry to the stock exchange’s benchmark IPC index this year, potentially boosting demand for shares after an 18 percent advance since its initial public offering in October.
Lala and Grupo Carso SAB, controlled by billionaire Carlos Slim, rank among the Bolsa’s top 35 companies under the methodology used to create the IPC, according to a report by the exchange. That means they may join the index as part of an annual reformulation Sept. 1, supplanting retailer Grupo Comercial Chedraui SAB and Slim’s Grupo Sanborns SAB, according to Signum Research and Grupo Financiero Ve Por Mas.
Membership in the 35-company IPC opens the way for share purchases by a greater range of investors, bolstering demand for a stock and possibly increasing the price. Grupo Financiero Inbursa SAB’s IPC inclusion in 2012 sparked a 12 percent jump and Coca-Cola Femsa SAB rose 5.7 percent after the Bolsa said it would join the index. Organizacion Soriana SAB fell 8.4 percent after it was removed.
“Lala is one of the strongest candidates to join the IPC,” Jose Maria Flores, an analyst at Ve Por Mas, said in a telephone interview from Mexico City. “There are institutional investors that only buy companies in a major index. So belonging to the IPC generates more trading and greater investor interest, which can lead to higher returns.”
Flores recommends buying Lala shares and says they still have room to climb 9 percent this year from yesterday’s closing price of 32.48 pesos. The stock has jumped 23 percent since hitting a record low on March 14, twice the increase of the IPC over the same period.
Lala advanced 0.8 percent to 32.73 pesos at the close in Mexico City, its fifth straight gain. Carso fell 0.9 percent to 67.74 pesos.
Lala is already set to join MSCI Inc.’s Mexico and Latin America indexes later this month, the data and index provider said May 14. Those are common benchmarks for international investors, said Nur Cristiani, Mexico equity strategist at JPMorgan Chase & Co.
“The amount of money that can be accessed through the MSCI is quite significant,” she said in a telephone interview from Mexico City.
In Mexico, a monthly Bolsa report on May 14 ranked Carso in 34th place in a listing of companies based on IPC selection criteria at the end of last month. Lala was 32nd.
“Being in these indexes is fundamental because it gives you more liquidity and visibility,” Alberto Osorio, chief executive officer of Mexico Fund Inc., which holds 4 million Lala shares, said in a telephone interview. “Lala was pretty flat last year after the IPO but now investors are recognizing its potential.”
Only the Bolsa can decide if Lala joins the IPC, the dairy company’s Chief Financial Officer Antonio Zamora said in an e-mail. Carso, Sanborns and Chedraui declined to comment.
The IPC’s annual recomposition is announced in August and takes effect the following month. Companies are chosen based on trading yardsticks such as liquidity and the value of shares available to the public, Signum Research analyst Homero Ruiz said.
“If Lala and Carso join the index, some investors might sell shares from Sanborns and Chedraui and replace them with Lala and Carso shares,” he said in a telephone interview from Mexico City.
Companies don’t always rally when they’re included in the IPC and they don’t always fall when they’re taken out. In Lala’s case, investors may already be bidding up the shares after the MSCI announcement and in anticipation of their possible entry to the IPC, according to Marco Montanez, an analyst at Vector Casa de Bolsa.
Its price target of 32.49 pesos, based on the average of six analyst estimates compiled by Bloomberg, implies little change from yesterday’s level. The stock has seven buy recommendations, two holds and zero sells. The company has said it may seek acquisitions after raising 14.1 billion pesos ($1.09 billion) in last year’s IPO.
“Lala may well be included in the IPC and that’s one reason the stock has done so well recently,” Montanez, who recommends buying the shares, said in a telephone interview from Mexico City. “It’s not the only reason. The outlook is good this year and they’ve got the shotgun loaded for a big potential acquisition.”
Last year, miner Minera Frisco SAB and broadcaster TV Azteca SAB posted gains of at least 15 percent on Aug. 30, the last trading day before their removal from the index. Since then, Frisco has tumbled 28 percent through yesterday while TV Azteca has advanced 16 percent.
In one case, a dispute over IPC membership sparked a court battle. Grupo Elektra SAB fell more than 30 percent in three days in 2012 after rule changes in IPC methodology threatened its position on the benchmark. The retailer kept its spot after winning a court injunction forcing the stock exchange to apply an older methodology to the company’s shares. Elektra is the worst performer on the IPC this year with a 22 percent decline.
Frisco declined to comment. Dan McCosh, a spokesman for TV Azteca and Elektra, also declined, citing company policies against commenting on share prices.
Carso, based in Mexico City, has one buy, one hold and three sells, according to analyst estimates compiled by Bloomberg. Their average price target of 63.13 pesos implies that the shares may fall 7.6 percent.
Trading in the stock market explains the Slim company’s possible IPC inclusion, as well as the potential expulsion of Chedraui and Sanborns, Signum’s Ruiz said.
“I’m not saying Lala and Grupo Carso are good or that Chedraui and Sanborns are bad,” he said. “But it’s important to anticipate adjustments in the IPC because they can create changes in the demand for some companies’ shares.”
To contact the reporter on this story: Brendan Case in Mexico City at email@example.com