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FIIs shed Sensex cos in favour of mid-caps

FIIs shed Sensex cos in favour of mid-caps
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First Published: Thu, May 03 2007. 12 39 AM IST

Updated: Thu, May 03 2007. 12 39 AM IST
Foreign institutional investors (FIIs) reduced their collective stake in two-thirds of the 30 companies that make up the Bombay Stock Exchange’s benchmark index, Sensex, abandoning the bluest of Indian blue chips for mid-sized firms in the first quarter.
During the quarter ended 31 March, FIIs pared their holdings in 20 Sensex stocks between 0.15% and 4.31%, according to a Mint analysis of these companies’ shareholding disclosures. The Sensex is the leading barometer for the health of domestic bourses.
In six firms, these FIIs pared their holdings by over 2 percentage points each. In contrast, they raised their holdings in nine Sensex stocks marginally—between 0.01% and 0.64%. In only one firm, Hero Honda Motors Ltd, did FIIs increase their shares by more than 1 percentage point.
During the quarter, Indian stock markets, as measured by the Sensex, fell 6.24%. After hitting its lifetime high of 14,652.09 points on 8 February, the benchmark index fell to 12,415.04 in the first week of March, before recovering to 13,072.10 points by the end of March. It was indeed a sharper fall compared with some of the other emerging markets. For example, shares in Hong Kong fell 3% and stocks in South Korea were down 1.24% during the same period.
While they were getting out of many Sensex companies, foreign investors, who started off the year by investing Rs492 crore in January, actually invested Rs7,200 crore in February, after accounting for stock sales. But they turned net sellers in March—selling equities worth Rs1,082 crore. But overall, they remained net buyers in the Indian stock markets to the tune of Rs6,600 crore during the first quarter.
“This makes it clear that foreign investors changed their strategy for Indian markets. They sold holdings in Sensex stocks, but instead of taking money out of India, they invested in mid-caps. They even brought in fresh funds for investment in mid-caps,” said a senior analyst with a foreign brokerage who didn’t want to be named.
Devesh Kumar, managing director, Centrum Broking, a local brokerage, says that earlier, investors were almost blindly buying the India growth story and the focus was hence on the Sensex stocks. “But now with rising interest rates and slowdown in overall growth, India has become a stock picker’s market,” he says.
Even within the Sensex stocks, there is no uniformity in FII behaviour. At a time when the Indian central bank tightened its monetary policy by raising interest rates and banks’ cash balance kept with itself to drain liquidity and fight rising inflation, FIIs cut their exposure to India’s biggest mortgage firm Housing Development Finance Corp. and HDFC Bank Ltd, but hiked their holdings marginally in ICICI Bank Ltd, State Bank of India and Bajaj Auto Ltd. These firms are interest-rate sensitive. Rising auto and mortgage interest rates hurt revenues of auto firms and mortgage companies.
Similarly, FIIs cut their exposure to Infosys Technologies Ltd, but bought more shares of Tata Consulting Services Ltd even though both tech firms are hit by appreciation of the rupee vis-à-vis the dollar. Since a substantial portion of their income is in dollars, when the rupee rises, the rupee equivalent income at these companies typically falls.
Overall, FIIs rushed to sell a portion of their holdings in cement, pharma and tech firms. In ACC Ltd, for example, their shareholding came down by more than 4%, from 24.98% to 20.67%. In Dr Reddy’s Laboratories Ltd, their holding fell from 48.94% to 46.13%.
The latest-quarter performance, in terms of FII stakes, comes after such foreign investors reduced their holdings in 16 of the 30 Sensex companies in the previous quarter, though in that period there were also five firms where they increased their stakes by more than one percentage point.
“India is one market where foreign investors have been very cautious since the beginning of the year. It was one of the worst-performing markets during February and March,” notes Arindam Bhattacharjee, a director at Demeter Advisors that advises offshore funds.
Naresh Kothari, head of institutional sales at Edelweiss Capital, a domestic brokerage, says that FII holdings in companies should be seen together with their position in the futures segment. “In case there was no arbitrage opportunity between the cash and the futures market, foreign investors could have sold the shares in the cash market and bought (the same company’s) futures in the derivatives market.”
Manish Kanchan, chief executive officer of Ambit Capital, echoes a similar view: “Most FIIs have gone slow in this market. The general sense from the beginning of the year was that valuations were rich in India. But it’s a cyclical phenomenon. They have come back to the Indian markets in the month of April.”
Indeed, in April, FIIs have invested, after any sales, an additional Rs6,679 crore in the Indian stock markets.
Withdrawal Symptoms (Graphic)
Parting Company (Graphic)
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First Published: Thu, May 03 2007. 12 39 AM IST
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