Catch the train

Tags: Stock Market

FIIs have picked up stake in many banking, pharma, FMCG, OMCs and mining shares during the December quarter

Catch the train
With the third quarter shareholding da­ta out for 158 companies from the BSE 500 pack till Friday; banking and financial institutions, mining, FMCG and oil marketing companies (OMCs) seem to be clear beneficiaries from a whopping $7 billion, or Rs 37,890 crore, investment in equities made by foreign institutional investors’ (FIIs) during the October-December period.

An FC analysis looked at the sectors that witnessed FIIs buying during the third quarter and took analysts’ views on whether the present valuations in those sectors were attractive even after the recent rally.

“Ownership data indicates that FIIs have increased their ownership of the Indian markets to the highest level in almost five years. Increasing Institutional ownership trends, FII or DII, have the potential to impart attractiveness to a particular stock but at the same time may also increase the volatility associated with the stock. In H12012 FIIs were a lot more defensive, having bought consumer staples, pharmaceuticals, utilities and IT. In the second half, FIIs turned more aggressive and also bought into some autos, financials, capital goods, IT and even metals,” Sony Mathews, investment advisory service at Geojit BNP Paribas Financial Services said.

Since October 1, the BSE benchmark Sensex has gained a modest 4.80 per cent, but notably as many as 210 stocks from the BSE 500 index climbed over 10 per cent during the same period.

Of the 158 companies that have reported their shareholdings, FIIs raised stake in 104 firms, lowered stake in 49, and retained their stake holding in the remaining five at previous levels.

Companies announce their shareholding pattern on stock exchanges every quarter, gives retail investors a glimpse of big foreign investor interest in Indian companies. The cues are noteworthy and some retail investors even consider the FII investment trend in their decision making.

However, giving much weightage to FII trend in stock picking, especially at times when valuations rise significantly over a brief period, raises concerns of ‘whether the train has been missed’.

Take an example of state-run Karnataka Bank. FIIs have raised their stake in the lender by 5.52 percentage points to 21.62 per cent in the December quarter compared with 16.40 per cent in the preceding quarter.

Since October 1, the stock has jumped 58 per cent raising concerns whether more upside is left in the stock.

Bloomberg data showed the lender's price-to-earnings (PE) ratio has risen to 13.85 compared with 8.46 in the early October period.

At once, it may still look reasonable when compared with HDFC Bank’s PE of 30.73. However, it should be noted that PSBs (public sector banks), generally have low PE ratios due to their unwanted exposure to troubled sectors.

So, even a rise in PE for a state-run lender from 8 to 14 is significant. HDFC Bank’s PE inched up from 28.12 to 30.73 during the same period.

“We believe that like most marketmen, FIIs were expecting the rate cut cycle to start from the January-March quarter. Since, the economic revival is first felt in the cyclical sectors, especially banking, which is also called as ‘the engine of growth'. Any rebound from rate cuts may pay well in the next two to three quarters. This may propelled FIIs to hunt for banking shares. The substantial hike of stake in some PSBs could be due to the fact that many private banks were trading at very high PE multiples while one-year forward PE of many PSBs were attractive, three months ago,” said Rajiv Mehta, AVP at IIFL.

HDFC (an NBFC), Federal Bank, IndusInd Bank, Axis Bank and IDFC (NBFC) have seen FIIs raising their stake by 4.45 per cent, 3.65 per cent, 2.46 per cent, 2.13 per cent and 1.97 per cent, respectively.

Mehta believed that present valuations are still attractive for banking counter. He believed that following FIIs footsteps could be beneficial, but was quick to advise investors to also consider bottom-up approach before selecting stocks. He was positive on SBI and Indian Bank among the state-run banks, while being bullish on Axis Bank, ING Vysya Bank and ICICI Bank, among the private lenders.

In the FMCG space, Tata Global Beverages, Hindustan Unilever, Bajaj Corp and Dabur saw FIIs raising stake by 2.61 per cent, 0.94 per cent, 0.57 per cent and 0.38 per cent, respectively. The stable earnings of FMCG companies at the time when there are lingering concerns over economic growth may have attracted FIIs towards defensive counters.

“FMCG companies have been able to maintain their profitability due to both volumes as well as value growth. Investors generally prefer stocks from this sector in times of economic slowdown due to their defensive nature. We expect FMCG companies may continue to deliver healthy double-digit earnings growth going forward. However, we also believe that the current valuations of FMCG stocks factor in the expected strong financial performance. Thus, we have a neutral view on the FMCG sector,” said V Srinivasan, research analyst for FMCG sector at Angel Broking.

FIIs also raised their stake in pharmaceutical firms. They picked up stake in Fres Kabi Oncology by 7.83 percentage points to 8.02 per cent in December quarter from meager 0.19 per cent in the previous quarter.

Aurobindo Pharma, Biocon, Torrent Pharma, Glenmark and Ranbaxy too saw FIIs raising their stake between 0.08 per cent and 2.21 per cent.

Sarabjit Nagra, VP and pharma expert at Angel Broking said “Going forward, we expect that pharma sector would continue to grow at healthy 15-20 per cent. We believe that investors can still reap the benefits of good returns, if invested for the long term. Our recommended stock in the space is Lupin, Aurobindo and Dishman Pharma.”

FIIs raised their stake by 1.07 per cent, 0.64 per cent and 0.34 per cent, respectively, in state-run OMCs (HPCL, BPCL and IOC).

IOC, BPCL and HPCL advanced 14.16 per cent, 10 per cent and 7.76 per cent, respectively, from where they were, at the end of September quarter. There were hopes in the market that the government may reduce the under-recoveries of OMCs by either hiking diesel prices or introducing partial deregulation in diesel prices.

“We are mindful of the value trap in the shares of PSU companies. However, right now, three things favour PSU stocks. The first is the likely shift in investment style from growth to value - PSU shares dominate value screens. Indeed, as a group, they are trading at multi-year lows versus the narrow index. Most PSU companies operate in cyclical businesses, and we believe that cyclicals will outperform defensives in the coming months, given the likely recovery in growth,” said Ridham Desai of Morgan Stanley India, last week, in a note.

Among mining stocks, NMDC, Sesa Goa, GMDC saw hike in FII stake. Not many IT companies have come out with their shareholding data yet. Some big names, including Infosys and Wipro, generated FII interest.

“The mining sector outlook is currently hazy considering the regulatory hurdles in the space. The recent drive to bring in tighter regulations and restarting of the banned mining operations brings in the possibilities for re-rating of the sector. Geojit BNP Paribas is currently “Underweight” on the metals and mining sector as a whole. Although the downside risks in the mining sector are low, we do not expect any strong recovery in the near future,” Mathews said. zz

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