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Why are foreign institutional investors (FIIs) buying into the Indian equity market when Indians are selling? This question is being asked frequently now. As on 30 September 2013, FIIs owned more than 20.7% of the companies that constitute BSE 500. It was in early 1990s when FIIs were given the permission to invest in India. In less than two decades since then, they have become the second largest owners of Indian equities after promoters. Their speed of gaining ownership over India Inc. is much faster than that of East India Company a few centuries ago.

FIIs have bought equities worth 1,05,605 crore year to date (YTD) in calendar year 2013. This while domestic investors have sold equities worth 72,255 crore in same period. This contradiction in behaviours puzzles many pundits.

One could put domestic selling down to a long list of factors: low growth, low investments, high fiscal deficit, low current account deficit, political uncertainty, US Federal Reserve’s tapering, high inflation, rising interest rates, rupee volatility, etc. FIIs, too, are aware of all these factors. They, however, have a choice of investing in many other countries. Domestic investors who do not have such a choice are selling Indian equities.

In my opinion, FIIs’ bullishness comes from what they have experienced directly or indirectly, and domestic investors’ bearishness comes from what they have experienced directly. Logically, they should be on the same side. Unfortunately, they are not. FIIs have bought what domestic investors have sold. And this has pitted them against each other in many cases.

Axis Capital did an analysis of returns given by Indian associates of companies listed globally in rupee as well as US dollar (USD) terms by making them a proxy for the experience enjoyed by the FIIs directly or indirectly.

The rupee returns of associate companies of globally listed companies outperforms the returns of those companies by a big margin across all time frames. This in a way shows the true impact of the India growth story when companies are appropriately managed by professionals. This performance is across diverse sectors such as fast-moving consumer goods, pharmaceuticals, technology, engineering and financial services.

It is, however, unfair to compare returns in different currencies. Even if we standardize in USD terms, the outcome does not change: associate companies of globally listed companies outperform the parents, albeit with a lower margin.

A classic case is Maruti Suzuki India Ltd. Maruti Suzuki was established as a joint venture between the Government of India and Suzuki Motor Corp. in 1982. Since the beginning, Maruti dominated the Indian passenger car market. It got listed on the Indian stock market in July 2003. In FY12, Maruti contributed a respectable 21% to Suzuki’s turnover and an even more meaningful 31% to its net profit. Now, Maruti has become the fulcrum for any analyst tracking the Suzuki stock. Maruti’s contribution to Suzuki’s incremental value or market capitalization is very meaningful. Since listing, it has delivered returns of 24.66% per annum in rupee terms. Suzuki, in yen terms and including the stellar performance from Maruti, has delivered 5.92% per annum. Maruti’s stock is up 10.82 times more than Suzuki’s in the 10 years since listing. Even in USD terms, Maruti has delivered 21.09% per annum returns compared to Suzuki’s 7.60% per annum over the 10 years. In USD terms, Maruti has outperformed Suzuki 5.5 times during this period.

There are other such examples: Hindustan Unilever Ltd (parent is Unilever Plc), Colgate-Palmolive (India) Ltd (Colgate-Palmolive Co.), Mphasis Ltd (Hewlett Packard Co.), etc.

FIIs cannot ignore the fact that it makes immense commercial sense for them to buy Indian arms of globally listed companies rather than buying globally listed companies. And this is the experience that is pushing them to buy Indian equities.

The domestic seller is not able to calculate that by selling Maruti at 180 in July 2003 (issue price 125), she may have made a quick buck but missed the journey of 10 times returns.

Nilesh Shah is managing director and chief executive officer, Axis Capital.

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