Mumbai: Foreign institutional investors (FIIs), the main drivers of Indian equity markets, seem to be shifting their focus from frontline large-cap (or high market value or market capitalization) stocks to small-cap (or small market capitalization) firms.
A Mint analysis of FII holdings in listed Indian firms in the past four quarters between April-June 2007 and January-March 2008, shows that this class of investors have progressively been raising their stake in small-cap stocks every quarter.
However, when it comes to blue-chip stocks that are part of the Bombay Stock Exchange’s (BSE) benchmark Sensex index and the National Stock Exchange’s broader 50-stock Nifty index, no definite pattern emerges. Nor is there any pattern in FII holdings in the same period in stocks that are part of the BSE-500 index.
SHIFT IN STRATEGY (Graphic)
In 63 of the 496 firms that constitute the BSE Small-Cap index, FIIs have consistently raised their holdings in the past four quarters. In the same period, they have pared their stakes in 40 such companies. In other words, for every two firms in which they reduced their stakes, FIIs have raised their holdings in three.
This is unique and very different from the movement of FII holdings in stocks that constitute other indices. For instance, in mid-cap stocks, FIIs have raised their stakes in 32 firms and pared them in 29. Similarly, among BSE-500 stocks, 64 firms have seen FII holdings rise in each of the past four quarters, while 62 have seen a fall.
The scenario is no different for Sensex and Nifty stocks. FIIs have continuously been raising their holdings in five Sensex stocks and paring stakes in seven. Similarly, nine Nifty stocks witnessed a rise in FII holdings in the past four quarters, while eight saw their stakes going down.
“I am not surprised with FIIs investing more in the small- and mid-cap space. Once investors get comfortable with a market, they get the confidence to move beyond the more large and liquid stocks and invest in unchartered territories. This is especially true for the older investors. A new investor would still go for large companies,” says U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd, an investment adviser to overseas investors.
Nilesh Shah, deputy managing director, ICICI Prudential Mutual Fund, also feels the same way. According to him, earlier, FIIs did not have enough local expertise to take risks in the mid- and small-cap space. However, over the past one year, various private equity funds have set up local teams, hiring local talent to specifically look at these stocks. “They always knew that this space offers higher returns, but now they have resources to research and invest in the space,” he adds.
BSE introduced the mid-cap and small-cap indices to track the performance of firms with relatively small market capitalization.
BSE’s mid-cap market capitalization stood at Rs7.74 trillion on Thursday, about 14% of the exchange’s overall market capitalization.
The small-cap firms’ market cap stood at Rs2.3 trillion on Thursday, just about 4.35% of the exchange’s overall market capitalization.
The BSE-500 index, which represents nearly 93% of the total market capitalization, includes all the 20 major industries of the Indian economy. Many of the mid-cap stocks are also part of this index.
“A lot of mid- and small-cap companies are reaching critical mass and sizeable scale and FIIs are seeing good opportunity in these stocks,” says Nitin Khandkar, senior vice-president (research) at Keynote Capitals Ltd, a Mumbai-based brokerage.
“The rising investments in these stocks has been happening for more than one year now as there is not much scope (of higher return) left in the large-cap companies,” he adds.
According to him, typically, small-and mid-cap stocks are at a premium to large caps. But, in the last three months or so, this premium has come down.
Vakrangee Softwares Ltd tops the list of small-cap firms in which FIIs have raised their stakes; it has seen FII stakes go up by 17.65 percentage points to 35.74% in the past four quarters. Karuturi Global Ltd has seen FII stakes rising by 15.58 percentage points. Seven more such firms, including Dewan Housing Finance Corp. Ltd and Nitco Tiles Ltd, have recorded more than 10 percentage points rise of FIIs stakes in the past four quarters.
Himachal Futuristic Communications Ltd leads the pack of small-cap stocks that have seen FIIs stake going down. Eight small cap stocks, including Elder Pharmaceuticals Ltd, have seen FII stakes going down by at least 10 percentage points or more.
Between June 2007 and March 2008, the BSE Mid-Cap index rose 23.39%, the BSE Small-Cap index 24.59% and the BSE-500 index, 29.81%.
The Sensex rose by 25.60% and the Nifty, 30.30% in this period. All Sensex stocks, except for DLF Ltd, are part of the Nifty.
Since January 2008, FIIs have turned net sellers of Indian stocks to the tune of $3.48 billion (Rs14,894 crore today), after being net buyers of Indian stocks worth $17.36 billion in 2007. Between June 2007 and March 2008, FIIs were net buyers of $12.75 billion worth of Indian stocks.