FIIs are betting on these small-cap stocks—should you?

In the December 2024 quarter, FIIs increased their stake in only nine Nifty 50 firms while trimming positions in the rest. A similar trend was seen in the Nifty 100 index, where just 26 companies saw an uptick in FII ownership.

Read this | Beaten-down small-caps begin to tempt mutual funds

However, the broader market told a different story. FIIs boosted their stakes in 44% of BSE Midcap stocks and 55% of BSE Smallcap stocks. Of the 937 small-cap firms that disclosed shareholding details, 466 saw increased FII interest.

Against this backdrop, here are five small-cap stocks where FIIs have recently raised their stake.

#1 Home First Finance

Home First Finance, a technology-driven housing finance company, primarily caters to first-time homebuyers in low- and middle-income groups. Housing loans account for 87% of its loan book.

FIIs significantly raised their stake from 25.5% in September 2024 quarter to 37.9% in the three months through December 2024. Key investors included BOFA Securities Europe SA ODI (0.55 million shares at ₹990), American Funds Insurance Series Capital Income (2.62 million shares), and Citigroup Global Markets Mauritius (1.1 million shares).

Meanwhile, promoter holdings have steadily declined for seven consecutive quarters, dropping from 23.4% in September 2024 to 14.3% in December 2024.

Looking ahead, the company aims to double its loan portfolio within three years. With assets under management (AUM) at ₹104.8 billion, a 30% annual growth rate could push it to ₹200 billion by FY27. Net interest margins (NIMs) are expected to stay in the 5.3-5.5% range.

#2 One Point One Solutions

One Point One Solutions, a specialist in customer lifecycle management, business process management, and technology services, operates across five locations and eight centers in India, employing over 5,500 IT professionals. The company serves clients across B2B, B2C, digital business, and marketplace verticals.

FIIs significantly raised their stake in the company, increasing from 3.2% in the September 2024 quarter to 14.3% in December 2024, largely driven by Hong Kong-based investment manager Ovata Capital’s stake acquisition.

Additionally, the company converted warrants into 1.78 million equity shares at ₹56 per share, generating ₹75 million. The transaction was completed after receiving the balance payment of ₹42 per warrant (75% of the issue price).

In December 2024, One Point One Solutions announced a strategic partnership with a global data analytics and consumer credit reporting firm. The collaboration aims to enhance its omni-channel customer engagement by deploying advanced contact center services, enterprise-level cloud-based telephony, and an automated complaint management system.

However, promoter holdings have declined for three consecutive quarters, falling from 60.7% in the June 2024 quarter to 51.4% in the quarter ended December 2024. Promoter pledging has also increased from 2.9% to 8.4% during the same period.

Looking ahead, the company plans to expand its presence in key sectors such as healthcare and financial services.

#3 Himatsingka Seide

Himatsingka Seide, a vertically integrated global textile company, designs, manufactures, and distributes a wide range of home textile products. It operates some of the world’s largest manufacturing facilities for bedding and bath products, drapery and upholstery fabrics, and fine-count cotton yarn. The company supplies home textiles for over 12 global brands, both licensed and owned, including Calvin Klein, Tommy Hilfiger, Kate Spade, Royal Velvet, Barbara Barry, and Waverly.

FIIs sharply increased their stake in the company, rising from 3.3% in the September 2024 quarter to 12.1% in December 2024. This surge was driven by a stake purchase by veteran investor Sunil Singhania, founder of Abakkus Asset Management.

On 12 November 2024, reports confirmed that Singhania acquired 8.5 million shares in Himatsingka Seide as part of its Qualified Institutional Placement (QIP). The transaction, later reflected in insider trade disclosures, was executed at ₹146 per share.

Meanwhile, promoter holdings declined, with the stake reducing by 10.3 percentage points to 37.3% in the December quarter.

Looking ahead, the company aims to increase capacity utilization to over 90% within the next 12 to 18 months. Management has indicated that profitability will be shaped by factors such as product mix, raw material costs, and operational efficiencies.

#4 GMM Pfaudler

GMM Pfaudler, a global leader in corrosion-resistant technologies, systems, and services, primarily serves the chemical, pharmaceutical, food, and energy industries. The Patel family and associated entities hold a 25.2% stake in the company as the sole promoter group.

FIIs increased their stake in GMM Pfaudler from 14.6% in the September 2024 quarter to 19.7% during October-December 2024, coinciding with a strategic expansion initiative.

In December 2024, the company announced plans to set up a manufacturing facility in Poland to strengthen its European operations. Through its German subsidiary, Pfaudler GmbH, GMM Pfaudler entered into an Investment and Shareholders’ Agreement on 20 December to acquire a 51% stake in a Polish limited liability company. The facility will focus on manufacturing high-quality stainless-steel equipment for the pharmaceutical and food industries.

Looking ahead, the company expects a surge in demand from the pharmaceutical sector, particularly for peptide production.

#5 Network18 Media

Network18 Media, one of India's most diversified media and entertainment conglomerates, has interests spanning television, print, digital content, filmed entertainment, e-commerce, mobile content, and magazines. Its primary broadcasting operations are managed by TV18 Broadcast, a subsidiary of Network18 Media & Investments.

FIIs increased their stake in the company from 2.3% in the September 2024 quarter to 6.6% during October-December 2024, coinciding with a major strategic shift.

In November 2024, Reliance Industries Ltd (RIL), its subsidiary Viacom18, and The Walt Disney Company completed a transaction to create India's largest media and entertainment firm, valued at ₹705.3 billion. The deal merged Viacom18’s media and JioCinema businesses into Star India Private Limited (SIPL), integrating RIL’s media assets with Disney’s India operations.

As part of the agreement, RIL infused ₹115 billion into the joint venture to drive growth. The merger strengthens Network18’s competitive position, unlocking synergies across television and digital platforms, enhancing audience engagement, and expanding revenue opportunities.

Promoters reduced their stake in the company by 18.1 percentage points to 56.9% in the December 2024 quarter.

Looking ahead, Network18 aims to leverage its extensive TV and digital footprint to reinforce its market presence.

In conclusion

The rising FII stake in small-cap stocks reflects growing institutional confidence, but investors should tread carefully. FIIs typically have a higher risk appetite, which may not align with retail investors' risk tolerance.

Small-cap stocks are inherently more volatile, and their valuations may already price in the optimism driving FII interest.

Also read | Smallcap survivors: These sectors weathered the market correction

Before investing, it's essential to assess a company’s fundamentals, growth prospects, corporate governance, and valuations rather than relying solely on FII activity as an indicator of future performance.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com