FIIs paring stakes in rate-sensitive sectors

FIIs paring stakes in rate-sensitive sectors
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First Published: Wed, Aug 13 2008. 12 43 AM IST

Updated: Wed, Aug 13 2008. 12 43 AM IST
Mumbai: Foreign institutional investors, or FIIs, the main driver of Indian markets, have systematically been paring their exposure to sectors such as banking, infrastructure, power, and oil and gas, in each of the past four quarters. At the same time, they have been increasing their holdings in sectors such as information technology (IT), pharma and fertilizers.
A Mint analysis of disclosures made by Indian companies to bourses at the end of each quarter reveals that FIIs have continuously reduced their stakes in each of the four quarters of the past year in 82 companies in the Bombay Stock Exchange’s basket of top 500 firms based on their market capitalization. They have raised their stakes in 60.
On a larger scale, among the 3,400-odd companies that reported their shareholding pattern for the four quarters between July 2007 and June 2008, FII shareholding in 154 companies has continuously reduced, while it has gone up every quarter in 120.
According to analysts, continuous selling in certain sectors such as banks and infrastructure, which are rate sensitive (affected by interest rates), was mainly because of expected monetary tightening, a slowdown in demand and high valuations of these stocks. When interest rates go up, the margins of banks come under pressure and their profitability is hit as they need to provide for depreciation in their bond portfolio. In a bid to combat inflation, which is at a 13-year high, the Indian banking regulator has been raising its policy rate and mopping up liquidity through a hike in banks’ cash reserve ratio, which defines the money that commercial banks need to keep with the central bank.
On the other hand, relatively low-valued IT, pharma and fertilizer stocks seem to be back on the radar of these investors.
Pharma stocks are traditionally known as defensive stocks whose business performance and sales are largely independent of the larger economic cycle. These companies are seen as good investments when the economy sours.
“There was a re-rating of rate-sensitive stocks in the past,” said Prabhat Awasthi, head of equity research at Lehman Brothers Securities Pvt. Ltd, the Indian arm of the US investment bank.
A serial sell-out was witnessed in the banking sector, and foreign investors continuously decreased their stakes in 11 banks and increased their exposure in only one—Federal Bank Ltd, an old private bank based in south India.
The Bangalore-based state-run Vijaya Bank has been the most affected, with FIIs paring their stake from 12.35% to almost nil between July 2007 and June 2008. During this period, Vijaya Bank’s shares fell 40.28%, from Rs57.35 each to Rs34.25. Bankex, the Bombay Stock Exchange’s banking index, fell 26.14% during this time while the exchange’s benchmark index Sensex fell 8.12%.
In IDBI Bank Ltd, FIIs reduced their stakes from 10.52% to 2.85%, and in Central Bank of India, from 10.54% to 4.27% during this period.
Rate-sensitive sectors such as banking, real estate and auto were among the biggest losers between January and June this year when the Sensex fell by at least 35%.
However, they have also recorded the biggest gains during the bear market rally that saw Sensex gaining some 3,000 points, more than 20%, since mid-July. On Tuesday, the index lost 291.79 points to close at 15,212.13.
Among the 30-stock Sensex basket, only three constituent companies have witnessed an increase in FII holding, while 10 have seen a steady fall in demand from these foreign investors. In the 50-stock Nifty index of the National Stock Exchange, five constituent companies have seen FII shareholding moving up, but there has been a decline in FII ownership in 17.
Among the Sensex companies, FII holding has been halved in ACC Ltd—from 18.8% in September 2007 to 9.12% in June 2008.
In the power sector, GVK Power and Infrastructure Ltd has seen FIIs decreasing their stake from 61.66% to 24.77%. In CESC Ltd, FII stake has come down to 23.61% from 29.61%, and in Jaiprakash Hydro-Power Ltd, from 3.06% to 0.4%.
In the oil and gas sector, FIIs have decreased their stake in India’s most valuable firm, Reliance Industries Ltd from 20.64% to 17.11%. In GAIL (India) Ltd, their stake has come down from 17.13% to 14.47%, and in Oil and Natural Gas Corp. Ltd, from 8.57% to 6.92%.
Fertilizer is one sector where foreign investors have been showing a lot of interest. They have increased their stake in four firms in this segment—Tata Chemicals Ltd (from 5.19% to 11.21%), Zuari Industries Ltd (from 2.07% to 6.02%), Coromandel Fertilisers Ltd (from 1.53% to 1.96%) and Rashtriya Chemicals and Fertilizers Ltd (from 0.15% to 0.45%) in the last four quarters. The fertilizer business is a politically sensitive one where government subsidy plays a major role.
“The FII exposure in fertilizers stock is purely a bet on populist policy decisions expected from the government in an election year,” said a Mumbai based fund manager who does not wish to be named.
So far this year, FIIs have sold Indian stocks worth $6.39 billion net of purchases after pumping in $17.36 billion in Indian markets in 2007.
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First Published: Wed, Aug 13 2008. 12 43 AM IST