FIIs’ discretion

Tags: Stock Market

Foreign portfolio investors raise bets in consumer discretionary stocks and select midcaps in Q4

FIIs’ discretion
Sectors and stocks whose fortunes are tied to a turnaround in the domestic economy have been in focus in the hope rally that has lifted equity benchmarks seven per cent this year, but overseas portfolio investors are looking elsewhere: discretionary spends.

A company that hawks branded innerwear and leisurewear for men and women, the master franchise holder for Domino’s Pizza and the local unit of a global operator of tours and luxury holidays were among the stocks that saw the biggest rise in foreign institutional investor (FII) holdings during the March quarter.

Latest shareholding data shows FII stakeholding went up by 10 per cent in Page Industries, the firm that holds exclusive licence to manufacture and distribute products of the US’ Jockey brand and four per cent in Cox & Kings, the London-headquartered travel firm.

Domino’s franchisee Jubilant FoodWorks actually saw a slight drop in FII stake, which peaked near the government-fixed cap during the quarter, prompting the company board to pass a special resolution to raise it to 55 per cent from 49. The Reserve Bank of India (RBI) notified the change this past week, making the stock soar. FIIs held a 46.62 per cent stake in the firm as of March 31.

Consumption as a theme is not hot with Indian equity investors, as inflation and interest rates have stayed high for long and income growth has stalled in a slowing economy. Latest factory output data showed a further weakening of consumption demand. The growth in consumer non-durables output contracted 1.2 per cent year-on-year in February while demand for consumer discretionary items remained in the negative territory for the 15th consecutive month, reflecting weak demand for cars and white goods.

But discretionary spends, which are linked to disposable incomes and lifestyle expenses being sustained by an ever-growing class of the affluent, are rising. Luxury car sales continued to rise in India despite the economic slowdown and rising fuel prices in a year when the mainline auto market struggled. Mercedes Benz sold 27 per cent more cars in calendar 2013.

Domestic stock investors keenly follow FII positions to draw cues on stocks and sectors, though market experts warn against such blind belief. “FIIs have different investment styles and strategies and one cannot look at them in the same light as domestic investors. Most FIIs are long-term investors and do not necessarily look at making gains from immediate factors like, say a currency arbitrage,” says Kishore Chinai, co-head of equities and senior vice-president at SBICap Securities.

Media is another space FIIs are bullish about. They raised bets by 6.64 per cent in Jagran Prakashan, a top media firm expected to benefit from the surge in ad revenues from the ongoing elections, and marginally in Zee Entertainment, where they held 48 per cent.

Financial Technologies, the promoter of the Multi Commodity Exchange, saw strong interest from FIIs, who raised stake by 4 per cent to 22.44 even as the regulators asked the firm to cut stake in the country’s biggest commodity bourse to 2 per cent from 24 by this month-end. FT also promotes the MCX Stock Exchange and the National Spot Exchange, the latter in the news for a payment settlement crisis for a year. The FTIL stock has risen 101 per cent in the last three months.

FIIs also bought into domestic tyre manufacturer Apollo Tyres, raising their holdings by 5.56 per cent. Tyre stocks have been in demand on expectations of a surge in replacement demand, which can lead to higher revenue growth. Apollo Tyres shares are up 48.67 per cent this year.

Fears of FII selloff haunted the stock market earlier last week. The BSE Sensex fell 207 points on Tuesday after foreign portfolio investors remained net sellers of equities for three consecutive days. As much as 70 per cent of institutional volume in the Indian stock market is driven by FIIs.

“Any negative on the macro-economic front or a negative election outcome or big changes to India allocations among the global funds due to global liquidity movement can lead to a potential selloff. This can have a serious negative impact on the equity market,” says Chinai.

The March quarter shareholding data shows a discernible shift in FII focus towards the midcap stocks, many which analysts say have lagged far behind their largecap peers in valuations.

Apart from Page Industries, Jagran Prakashan and Financial Technologies – which are part of the midcap basket whose market capitalisations range between $5 billion and $1 billion – Nesco, Aurobindo Pharma, IRB Infrastructure, LIC Housing Finance, GSFC and PVR were among myriad other counters where FII bought more shares.

Ritesh Jain, chief investment officer of Tata Mutual Fund, advises investors against any market-cap bias. “One should accumulate quality stocks on the merits of value and investors’ risk profile,” he says.

Within the 30-stock Sensex pack, FIIs increased exposure in 16 firms, which included Axis Bank (up 5.56 per cent), ICICI Bank (1.46 per cent), HDFC (1.46 per cent), Infosys (up 1.45 per cent) and RIL (0.35 per cent). But they reduced shareholding in NTPC by 0.99 per cent to 9.33 and in HDFC Bank by 0.84 per cent to 34.08. Shareholding data for three Sensex stocks – Maruti Suzuki India, Cipla and Sesa Sterlite – were not available.

Beyond the index basket, FIIs bought into two other banks – IndusInd and Karnataka Bank, but sold up to two per cent holdings in Federal Bank, Canara Bank and South India Bank. Chinai of SBICap Securities expects banks to do well in the months ahead as he expects interest margins to stabilise and asset quality to improve on better recoveries and sale of bad loans.

Non-banking financial firms Bajaj Holdings, L&T Finance and IDFC also saw FII holdings go up during the quarter, partly because they were in the race for new bank licences. RBI on April 3 picked only IDFC and microfinance player Bandhan for new permits.

In the IT pack, FIIs picked more shares in midcap firms Persistent Systems, Geometric, Polaris and Tata Elxsi even as investors broadly deserted export-oriented businesses because the domestic currency has begun to strengthen against the dollar. But the foreign institutional players sold shares in two other midcap IT firms, MphasiS and Tech Mahindra.

FIIs cut holdings also in a host of stocks from pharma, finance, auto, power, realty, FMCG and capital goods sectors. Some of the prominent names that saw drop in FII holdings during the quarter included Jet Airways, Wockhardt, TTK Prestige, McLeod Russel, Asian Paints, Claris Lifesciences, IGL, Jain Irrigation, IVRCL, HCC, Greaves Cotton, Monnet Ispat, Indiabulls Realty and Ashok Leyland.

The FII view on the Indian economy and equities may change for the better or worse depending on the outcome of the ongoing elections and policies the new government pursues. “As FIIs are big drivers of the market, they will keenly watch the new government. If its policies enthuse business activity and encourage foreign capital, India will fare better in FII inflows,” says Jain of Tata Mutual Fund.

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