After going on a selling spree in the Indian markets until March 2009, foreign institutional investors (FIIs) have made an unexpected about-turn to make net purchases in Indian stocks in recent months. FIIs pumped in Rs 31,200 crore on a net basis into Indian stocks between end- March and June 2009, after putting through net sales of over Rs 43,000 crore between June 2008 and March 2009.

So, what stocks and sectors did FIIs fancy on their return to the Indian market? Did they markedly change their preferences, having burnt their fingers in emerging markets after the credit crisis? Shareholding patterns of the CNX-500 companies (available for 377 companies as on July 25, 2009) were studied for each of the quarters from June 2008 to June 2009, to get some answers.

One in two see lift

The buying spree by the FIIs has undoubtedly lifted their holdings in a wide swathe of companies; with one out of two S&P CNX 500 (186 out of 377) seeing a jump in FII holdings between March and June 2009. However, even now the level of FII holdings in Indian stocks remains well below their June 2008 (pre-credit crisis) levels. This is evident from the fact that, even after the recent deluge of inflows, two thirds of the CNX-500 stocks currently feature FII holdings much below their June 2008 levels.

Large-, mid-caps preferred

Having favoured mid- and small-cap stocks during the earlier bull market, the FIIs appear to have pegged up their stakes in large-cap stocks with greater enthusiasm this time round.

More large-cap stocks saw FIIs increase their stake than mid- or small-caps between March and June 2009. Nearly 70 of the 96 large-cap stocks in this universe saw FIIs raising their stakes; whereas only 45 of the 84 mid-caps found favour with the FIIs.

Between mid- and small-caps, however, the FIIs chose to play it safe by zeroing-in on mid-caps. Overall, almost one out of two companies that saw higher FII holdings came from the mid-cap basket.

Sector preferences

Sector-wise, realty, banks and financial institutions, metals, IT and telecom, oil (exploration and refining), capital goods and FMCGs dominated the FII shopping list.

Not surprisingly, given the run-up in their prices and the qualified institutional placements put through by these companies, the realty majors — Indiabulls Real Estate, Unitech and DLF topped the list of companies that saw the maximum increase (6-20 per cent) in FII holdings the last quarter.

If one focuses on the stake hikes through the secondary market alone, the list of companies that saw the biggest stake hikes came from a mix of sectors — Uttam Galva Steel, Carborundum Universal, Geometric, Kirloskar Oil NDTV and IDFC.

Sticking to favourites

Surprisingly, there is no sign that the FIIs have markedly changed their sector preferences in the aftermath of the credit crisis. Sectors where the FIIs picked up stake in the recent quarter are pretty much the ones they discarded between June 2008 and March 2009.

For example, banks and financial institutions, steel, IT, oil (exploration and refining), which are currently on the FII ‘buy’ list, bore the brunt of selling last year. This suggests that the bout of FII selling was probably driven more by liquidity requirements last year than by any negative view on the sectors held.

Consider this. A total of 14 stocks saw a substantial decline of FII holdings (9-19 percentage points) between June 2008 and March 2009. But since March this year, the FIIs again increased stakes in 11 of these companies.

However, the overall stake hikes still remain below what was offloaded by them in the earlier quarters, which is understandable given that the buying only started from the March 2009 quarter. Barring a few stocks, such as Bajaj Hindustan, Gujarat NRE Coke and Suzlon Energy (where the FIIs increased holdings by 3-7 per cent), the other companies recorded just about 1-2.5 per cent increase in FII holdings in this period.

Dr Reddy’s Labs, Kalpataru Power Projects, L&T, Polaris Software, Reliance Infrastructure, IDFC and Indiabulls Financials, are instances where the FIIs have, in the June 2009 quarter, bought back more than double what they sold the previous quarter.

Where they trimmed stakes

Despite the substantial net buying they indulged in over the past quarter, the FIIs did not have a uniformly bullish view on all the stocks they held. They continued to pare stakes in a good number of stocks too.

For one, in spite of their strong comeback post-March, the FIIs adopted a cautious stance on small-cap companies. Banks and financial institutions, brokerage houses, and financial service companies, small and mid-sized IT companies, realty (mainly construction) and media are the sectors where more stocks saw the FIIs selling this quarter.

While they preferred to hike stakes in many large-and mid-cap pharmaceutical companies such as Ranbaxy, Sun Pharma and Dr Reddy’s Labs, they seem to have taken a sceptical view about small-caps such as Alembic, Dishman Pharma, Matrix Labs and Strides Acrolabs.

Two, the FIIs largely stayed put in Nifty and Sensex companies with Mahindra and Mahindra and Bharti Airtel the only ones to see material FII selling (1-1.7 percentage points fall). ABB, Bharat Petroleum, Power Grid Corporation, Tata Communication, Hindustan Unilever and NTPC also saw the FIIs pare stakes, but by less than one percentage point.

Three, there were a good number of (154) stocks where the FIIs consistently held a negative view and have been reducing their stakes since June 2008. DS Kulkarni Developers, NIIT, Rolta India, REI Agro, Bajaj Holdings and Vishal Retail saw FII holdings fall by 6-30 percentage points over the four quarters since June 2008.

Continued interest

On the other hand, even as the market went through several gyrations between October 2008 and March 2009, the FIIs did not seem to lose much faith in the select 113 stocks in the CNX-500 basket.

Companies where FIIs actively increased their interest during this period include, Uttam Galva, Dynamatic Technology, Geometic, NDTV, Carborundum Universal, Educomp Solutions and Amtek Auto. Maruti Suzuki is the only Sensex company that notched up a sharp increase in FII stake (more than 4 per cent) in that period.

Game change?

That the FIIs have broadened their buying is clear from the fact that they made more purchases in the June quarter than in the preceding one. Only one out of four companies ) registered an increase in FII holdings in the March 2009 quarter. Nearly twice this proportion saw an increase in the June 2009 quarter.

The other key change in trend in the June 2009 quarter, compared with March 2009 quarter, was renewed FII interest in sectors such as banking and financial services, pharmaceuticals, FMCG, capital goods, metals, IT and telecom — the same ones they offloaded in the preceding quarter.

 

source:BL