Mumbai: Foreign institutional investors, or FIIs, the largest category of investors in the India equity markets, are back with a bang. FIIs increased their investment in four out of five firms among the 50 that make up the Nifty index during the quarter ended June.
Investors bought into the India growth story and expectations of economic reforms after the Congress-led United Progressive Alliance (UPA) won a decisive mandate in the April-May general election.
The Bombay Stock Exchange’s Sensex, India’s most widely tracked equity index, gained 49.2% in the three months ended June, the best quarterly gain in 17 years. There are 30 stocks in the Sensex, and 29 of them are also listed on the Nifty.
“It’s a reflection of political stability and reforms moving along,” said Sanjay Sachdev, country manager and regional fund manager (South-East Asia) at Tokyo-based Shinsei Bank Ltd. “The global liquidity flow has also improved and that has a positive impact.”
As liquidity returned slowly to the global financial system and risk appetite resurfaced on hopes of an early turnaround in major economies, investors started buying.
For 15 straight weeks since 9 March, institutional investors were net buyers in emerging markets, including India, driving the valuation up by as much as 80% in the case of the Sensex.
According to fund flows tracker EPFR Global, emerging market equities collectively absorbed $26.5 billion (Rs1.28 trillion) of institutional investment in the quarter ended June, the highest since the December quarter of 2007.
In India, foreign investors bought stocks worth $6.42 billion.
What has also probably helped bring in foreign capital is the relatively strong economic growth in India.
“The rest of the world is struggling,” said Abhay Aima, head of equities, private banking and third-party products, at HDFC Bank Ltd, the country’s second largest private bank. “In India, people are saying worst case is 6% (economic growth). That attracts capital.”
Gross domestic product, or GDP, grew at 5.8% in the January-March quarter, much lower than 8.6% in the year-ago period, but higher than market expectations of 5%. GDP grew 6.7% in the last fiscal.
Among the 50 stocks on the Nifty, the benchmark of the National Stock Exchange, FIIs increased their holdings in 42. Under the norms of the capital market regulator, the Securities and Exchange Board of India (Sebi), listed firms are required to file a detailed break-up of their shareholding pattern to stock exchanges for every quarter within three weeks of the end of the quarter.
Real estate firms
The maximum rise in FII holding was in real estate developer Unitech Ltd—from 8.24% at the end of March to 22.79% on 30 June. The increase in Unitech is on account of the company selling shares to qualified institutional buyers to partly retire its short-term debt.
DLF Ltd, India’s largest real estate company, and Indiabulls Real Estate Ltd also saw their FII holdings increase substantially because of qualified institutional placements, or QIPs.
QIPs are private placements of equity shares, or securities convertible into equity, by a listed company with qualified institutional buyers, both domestic and foreign, approved by the market regulator. In the June quarter, 13 companies raised Rs12,500 crore through QIPs.
While the FII holding in DLF rose by 9.16%, in Indiabulls the rise was even higher— 19.98%.
Photo: Abhijit Bhatlekar / Mint
Indiabulls is, however, not part of the Nifty, and is included in the BSE-500, an index of the top 500 firms that constitute at least 93% of India’s total market capitalization.
In this index, the increase in FII holdings was not so widespread, and only 56% of the companies saw a rise in foreign holdings.
When foreign capital returns to a country, blue-chip stocks are the first to benefit, fund managers say. It’s only later that institutional investors target the middle rung.
Indeed, the picture changes if one were to compare FII exposure in all these companies at the end of June with the year-ago figures.
In June last year, the five-year bull run on the Indian market that started in 2003 was slowly petering out. The collapse of Wall Street investment bank Lehman Brothers Holdings Inc., which deepened the financial turmoil in the US and Europe, was still some three months away.
In 32 of the 50 Nifty stocks, FIIs had a larger exposure in June 2008 than they do now. The difference is starker among the BSE-500 companies, where 265 firms had larger FII stakes a year ago.
This means that despite the dramatic increase in FII holdings in Indian firms in the June quarter of fiscal 2010, FII holdings in most Indian companies are still lower than what they were a year ago.
This also indicates that more buying may be on the cards despite valuations being slightly stretched. Sensex companies are trading at a collective 17-18 times their estimated fiscal 2010 earnings. The higher this figure, known as the price-earnings multiple, the costlier the stock.
However, the recent raft of positive earnings augurs well for Indian firms. After a sharp fall in equity prices in the aftermath of the Union Budget, the Sensex has gained 6% since the beginning of July, riding corporate earnings. For the week ended 24 July, the Sensex gained 4.3% to close at 15,378.96 points.
In India, foreign investors bought stocks worth $6.42 billion. Sandeep Bhatnagar / Mint
“With relatively low institutional ownership, strong global and local liquidity, the prospective bottoming out of the growth cycle, reasonable policy momentum, the coming recovery in earnings growth, strong corporate balance sheets, stable politics, and fair valuations, Indian equities are in a sweet spot,” Ridham Desai and Sheela Rathi of Morgan Stanley India Co. Pvt. Ltd wrote in a 20 July report. Their best-case scenario takes the markets to an all-time high by June 2010.
FIIs, considered the backbone of Indian equity markets, entered the country in 1993. Since then, they have invested some $55.32 billion. In 2007, they pumped in $17.78 billion, the largest ever inflow of foreign portfolio investment in India, but the financial crisis of 2008 saw them withdraw $12.18 billion. Since January this year, they have invested $6.58 billion.