LIC, MFs plough $2 billion into IT firms in Q4 as shares tumble

This is the highest purchase by fund managers in a single quarter, based on the average price of shares traded during the period. The price is determined by the volume weighted average price (VWAP), taking both volume and price into account.

As stocks of IT, telecom and technology companies kept falling over their declining margins, below-par financials and a weakening dollar, the country’s mutual fund managers and insurance behemoth LIC rushed to increase their holdings in these companies by an estimated ₹16,400 crore during the January-March period.

Simply put, VWAP can be explained thus: if a fund buys 1,000 shares at ₹10 apiece and another 500 shares at ₹12 apiece, the VWAP of the share is ₹10.66 (1,000X10) plus (500X12)/1500.

While LIC invested an estimated ₹5,930 crore in top tech firms, MFs raised their holdings in 45-odd listed IT, telecom and technology firms by an estimated ₹10,470 crore, according to the VWAP calculation.

LIC has invested at least ₹2,540 crore in Infosys alone, while MFs bought additional shares worth ₹2,938 crore in the IT major.

“LIC is typically a buyer when there is a substantial fall and it tends to hold most stocks for a long time frame, as much as for 10-15 years," said A. Balasubramanian, chairman, Association of Mutual Funds in India (Amfi), commenting on the reasons behind the insurer hiking stakes across beaten down technology stocks, thereby absorbing sales by foreign portfolio investors (FPIs).

He said LIC’s money managers tend to be “different" from domestic and overseas fund managers, following a contrarian approach, which was “by and large" proven right, when asked about the prudence of buying tech stocks at a time of global economic uncertainty.

Apart from Infosys, the state-run insurer invested the most in Tech Mahindra, Wipro, Mphasis Ltd, HCL Technologies, TCS, Coforge, L&T Mindtree, Bharti Airtel and in L&T Technology, in which LIC has increased its holding the most (by 1.11 percentage point) for ₹418 crore.

Meanwhile, MFs increased their holdings the most in Infosys, TCS, PVR, Bharti Airtel, Tech Mahindra and L&T Mindtree. In PVR, fund managers raised their percentage holdings the most (about 7 percentage points) for ₹2,166 crore during the quarter ended 31 March.“MFs’ buy side figure of IT stocks included a substantial exposure taken by arbitrage funds," said Nilesh Shah, managing director, Kotak AMC. “These funds buy a stock on the cash market and sell on the futures or vice versa if they spot a large price differential on either market," said Shah.

Based on VWAP, the combined investment by LIC and mutual funds in the 45 technology, IT and telecom companies has been lower in all previous March quarters. During the March quarter in FY22, they increased equity holdings in these companies by ₹11,758 crore; in FY22, it decreased by ₹2,910 crore, in FY21, it increased by ₹5,807 crore, in FY19, it increased by ₹1,270 crore, and in FY18, it increased by ₹3,644 crore. During previous March quarters, the investment has been much lower.

“Funds were largely taking a bottom-up approach rather than considering IT as a sector, given the turbulence in terms of lower-than expected results in some, management changes in the others, and corporate action such as buybacks," said Shah.

While Shah refused to comment on stocks, Kotak MF is a top holder among mutual funds in Persistent Systems, having a 4.63% share in the stock as of March end 2023. The stock has risen a whopping 476% in the past five years, trading at ₹4,636 apiece currently.

The record high single-quarter purchase by India’s fund managers and LIC came in the wake of the continuing pressure on IT companies due to their lacklustre sales and the slide in dollar vis-a-vis the rupee.

Most IT companies declared weak performance during the March quarter due to seasonality and the weak dollar. This is because a large portion of the revenues in Indian IT and technology firms comes from sales that are calculated in US dollar terms.“Shares (of IT, telecom and technology) corrected during the quarter and many were trading below their fair valuation, which gave us a good investment opportunity," said a fund manager.

During FY23, shares of companies on BSE’s IT index lost 22%, while in the March quarter, it fell by 0.67%. Companies on BSE’s Telecom index lost 13.35% in the March quarter, while for the full fiscal, it fell by 18.4%. Similarly, stocks on BSE’s Technology index lost 20.12% in FY23, while falling by 3.25% in the March quarter.

While domestic institutional investors have significantly enhanced their holdings in IT, telecom and technology firms in the March quarter, the question remains how these funds will find an exit if the slowdown in the IT and tech space persists.

Typically, whenever domestic investors need to monetize their holdings, it is the FPIs who come in as the main buyers. Right now, not too many FPIs are willing to bet on Indian stocks, given the war, global uncertainties and the US Federal Reserve’s ongoing interest rate hikes.

Analysts said that in June, the US central bank is likely to hit a pause on raising interest rates, which is when FPIs will start looking to bet on Indian stock markets to enhance their returns.

Rajesh Palviya, senior VP at Axis Securities, expects FPIs to return “in earnest" to Indian tech stocks by the year end, after a likely interest rate-induced recession in the US.

“A recession in the US is probable in H2 (second-half) this year and I expect the Fed to begin cutting rates by the year-end to spur growth, at which time EM stocks, especially quality names in the tech sector in markets like India, will attract them," said Palviya.