Foreign institutional investors (FIIs) have been rather nimble-footed in the current bear market. A cursory look at their purchase and sales figures shows they have been net sellers of Indian equities worth Rs25,285 crore so far this year, leading to a view that they have added to the drop in share prices.
(TWO-WAY STREET) But they haven’t been sellers throughout. When the markets bottomed in mid-March and again in mid-July, they were heavy net buyers, especially in the derivatives segment. Between mid-March and end-April, they bought equities worth Rs3,000 crore in the cash segment and took net long positions worth another Rs7,100 crore in futures.
The National Stock Exchange’s Nifty index rose 15% during that period. Similarly, during the recent rally, where the Nifty rose about 20% since mid-July, FIIs have bought equities worth Rs2,950 crore in the cash segment and taken long positions worth Rs8,320 crore in futures.
In January, when the Nifty crashed from above 6,100 points to under 5,000, they sold futures worth more than Rs15,000 crore.
In the next few trading sessions, when the markets recovered, foreign investors were net buyers of futures worth Rs17,000 crore. As a club of investors, FIIs seem to have perfected the art of selling high and buying back low, as much as they have done with the simpler strategy of buying low and selling high.
FIIs were amongst the first to enter the rally that began in mid-2003. But in May 2006, when the markets crashed by 30% in about a month, FIIs had proved to be the savviest traders on the Street, being net sellers through the period when stocks fell, and net buyers at lower levels, when the markets started recovering.
As Mint reported on Monday, FIIs, who issue participatory notes to unregistered clients, lent stocks lying in their inventory to some short-sellers in exchange for a fee. These short-sellers must be among the nimble-footed investors whose activity is reflected in the FII purchase and sales figures this year. While it is true that many FIIs—especially the late entrants—would have suffered losses due to the sharp correction in Indian equities this year, another set of smarter investors have made the most of the fall by short sales.
Ashwin Ramarathinam contributed to this story.
RIL, RPL dance to different tunes
Till the end of June, stock prices of Mukesh Ambani-led Reliance Industries Ltd (RIL) and Reliance Petroleum Ltd (RPL) moved in tandem, falling some 35% each from the heights scaled in January. It was natural, since RPL is RIL’s subsidiary. But over the past month, there has been a curious divergence between the performance of the two stocks. In the month to 12 August, while the RIL stock rose 14.8%, the RPL scrip fell 1.2%.
The ostensible reason for the deviation lies in the outlook for refining margins. A report by Merrill Lynch and Co. Inc. points to plenty of reasons for the pessimism about RPL. The factors listed include a sharp fall in Singapore refining margins since mid-July and the fact that RPL’s production could put further pressure on refining margins.
The spread of Asian diesel and petrol prices to Dubai crude, also known as the Asian crack spread, has also declined from $16.20 (Rs687 today) per barrel in mid-July to $11.60 per barrel.
But surely, lower refinery margins hurt RIL too? And if refining margins are pushing RPL down, why should the stock of refiner Chennai Petroleum Corp. Ltd be up 9% in the past month?
The other reason for the disenchantment with the RPL stock is that a large section of the market expected the refinery to start commercial production well ahead of its December deadline. But if the refinery starts in September, as expected, it will need at least three months of trial production, which means it will have only around three months of commercial production the fiscal year to March. That disappointment has also taken its toll.
Another concern lies in the 30% of petrol that RPL has in its product slate, compared with 10% for RIL. But analysts point to a recent International Energy Agency report that said most of the oil demand growth “will be concentrated in transportation fuels”. It stated that while global petrol demand is growing, “distillates (jet fuel, kerosene, diesel and other gas oil) have become—and will remain—the main growth drivers of demand”.
And since RPL has a much larger share of transportation fuels in its portfolio than RIL, it should do better. Also, some analysts say RPL’s more state-of-the-art refinery will be able to get higher margins than RIL.
Perhaps the reason for the difference lies in RIL’s other businesses—with ethylene, propylene and paraxylene margins moving up. But the outlook is uncertain, as new polymer capacity comes on stream in West Asia at the same time as global growth slows. It may also be the expectation of speedy resolution to the gas pricing dispute that has driven the RIL stock upwards.
Nevertheless, since RPL is a subsidiary of RIL, any pessimism in the RPL stock should get reflected in the RIL scrip as well. After all, Merrill Lynch cut its fiscal 2009 earnings per share for RIL by 13%, solely due to its less rosy view of RPL.
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