FIIs cut exposure to Sensex and Nifty; buy more mid-cap stocks

FIIs cut exposure to Sensex and Nifty; buy more mid-cap stocks
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First Published: Sun, Dec 02 2007. 11 54 PM IST

Updated: Sun, Dec 02 2007. 11 54 PM IST
Mumbai: In a clear shift of India strategy, foreign institutional investors (FIIs) are paring their exposures to blue-chip Indian stocks that constitute the Sensex, the benchmark index of the Bombay Stock Exchange (BSE), and Nifty, the broader index of the National Stock Exchange (NSE), and are allocating more funds to mid-cap stocks.
A Mint analysis of FII investments in the 30 Sensex stocks and the 50 Nifty stocks in 12 months between September 2006 and September 2007 shows that FII holdings have dropped in 22 of the 30 Sensex stocks, and 31 of the 50 Nifty stocks.
In the same period, FIIs increased their holdings in 165 of the 276 firms that constitute the BSE mid-cap index.
During this period, the BSE mid-cap index rose by 44.17%, from 5,148.38 to 7,422.43, while the Sensex rose by 38.84%, from 12,454.42 to 17,281.10. Except for one stock, all Sensex stocks are part of the Nifty index.
Listed firms in the country are required to furnish their shareholding data to stock exchanges every quarter. The latest data, for the quarter ending 31 December, will be available in January.
One of the main reasons for the downward movement in FII stakes in Sensex and Nifty companies, according to fund managers, is the change in the investment policy of foreign investors. “Many new India-focused funds now have thematic investment philosophy,” said Chandrakumar Gujadhur, custodian of Mauritius-based Apex Fund Services that manages a $1.3 billion (Rs5,161 crore) fund with 85% allocation to India. These funds are putting in money in sectors such as power, infrastructure and so on and the firms representing these sectors may not be necessarily be a blue-chip stock. Thus, while the overall FII investment in India has increased, much of this could be going to companies that are not necessarily a part of the Sensex or the Nifty. “Unlike in the previous year where India was one of the portfolio markets, there is a big rise in India-focused funds. Also, most Asia and emerging market funds have increased allocation of capital in India,” Gujadhur added.
Some of the mid-cap stocks where FII shareholding has moved up significantly have given superior returns in the past one year. The FII stake in Hyderabad-based GVK Power & Infrastructure Ltd (GVKPIL) is up by 60 percentage points. The stock gave about 267% returns in a year. Similarly, shares of realty firm Phoenix Mills Ltd, textile manufacturers Provogue (India) Ltd and Donear Industries Ltd gained over 200%. The FII holding in these firms has risen by between 20 and 40 percentage points in the past year. Media firm UTV Software Communications Ltd gained 241% and FII holding in this firm has gone up by 20 percentage points.
Andhra Bank and Alok Industries Ltd are exceptions in this category. Even as FII ownership in these firms went up by over 20 percentage points, their shares rose in the single-digits.
“The attention of foreign funds is now directed more towards select sectors in India that have been growing at a super pace,” said a Hong Kong-based hedge fund manager who did not wish to be named. ”With India counting among few sustainable growth markets across the globe, funds are trying to participate in the fastest growing sectors,” he added. “However, (this) does not mean that large Indian companies are out of favour.”
Among the Sensex stocks, FII stake has fallen most in HDFC Bank Ltd and Ambuja Cements Ltd—by over 8 percentage points each. Two automobile stocks, Tata Motors Ltd and Mahindra & Mahindra Ltd, have seen the FII ownership going down by more that 7 percentage points. Indian mortgage major Housing Development Finance Corp. Ltd (HDFC), too, has seen the FII holding going down by more than 5 percentage points.
However, lowering of FII holding does not necessarily mean that overseas investors are losing interest in these stocks. There are instances where the FII stake has gone down on technical grounds. For instance, HDFC Bank had sold around 20 million shares through an American depository offering and raised $607 million for its business operations. It also made a private placement with its promoter HDFC. Then, HDFC itself privately placed 6.7% stake with the Carlyle Group and Citibank NA. These exposures are considered as foreign direct investment. Following these developments, even though FII exposure in both HDFC and HDFC Bank has gone down, the overall foreign stake in these firms continued to remain high.
In the case of Ambuja Cement, an open offer from Swiss cement company Holcim Ltd, led to many FIIs selling out.
“A follow-on public offer or a convertible bond issue could easily alter the shareholding composition in a company,” points Sameer Narayan, head of portfolio management services at ABN Amro Asset Management India Ltd. “This could be one of the reasons why there is a drop in FII ownership in many Sensex stocks,” he said.
Tata Consultancy Services Ltd, Grasim Industries Ltd, Larsen & Toubro Ltd, State Bank of India and Reliance Industries Ltd are among the eight Sensex stocks that reported a rise in their FII holding. FIIs have invested a record $17 billion in Indian equities in the first 10 months of 2007. As on 30 November, there are 1173 FII accounts and 3,558 sub-accounts registered with the Indian capital market regulator. Five new accounts and 26 new sub-accounts were added last week.
Ashwin Ramarathinam contributed to this story.
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First Published: Sun, Dec 02 2007. 11 54 PM IST
More Topics: FII | Sensex | Nifty | Mid-cap stocks | HDFC Bank |