Foreign portfolio investors (FPIs) have reduced their exposure to India’s biggest listed companies significantly in January-March, bringing the foreign institutional ownership in Indian companies to at least 25-quarter, or six-year, low.
On 30 March, foreign institutional ownership for 308 firms on the BSE 500 index, which contribute around 90% of India’s market capitalization, slumped to 12.3%. The sell-off by FPIs, because of steep valuations and poor macros, intensified following the covid-19 outbreak, slashing stakes in FMCG (fast-moving consumer goods) and pharma stocks. This is in contrast to the 14.16% stake held by FIIs in these companies Q4FY19 and 13.36% last December, according to data provided by Capitaline.
“This could be attributed to FIIs going on a selling spree in the last week of February, which lasted till April. While the Indian markets remained resilient initially, it too came in the line of fire, like other global markets, by the covid-19 scare in the last week of February," said Himanshu Srivastava, senior analyst and manager research, Morningstar Investment Adviser India.
Uncertainty over the impact of covid-19 on the global and domestic economy prompted investors to adopt a cautious stance towards emerging markets such as India, which are considered riskier destinations compared with the developed world during crises of global proportions, said Srivastava.
“When there is a flight to safety or when risk-taking is off the table, investors usually shift their focus towards safe havens. This triggered an exodus of foreign investors from emerging markets and India was no different," he said.
In the first three months of 2020, FIIs sold Indian shares worth $6.09 billion. They had got into a sell-off mode to the tune of $7.88 billion in March, a month when Sensex dropped 26% in dollar terms and Indian currency depreciated.
Sectorally, FIIs reduced exposure mostly in fast-moving consumer goods (FMCG) and pharma stocks. In March, FPIs owned an aggregate 13.38% in FMCG stocks, down from 15.10% in the year-ago period. Foreign investors cut stakes in pharma stocks to 14.77% in March quarter from 17.04% in same quarter last fiscal. Sector specific reasons along with worries of slowdown led to such a sharp sell-off, analysts said.
Among FMCGs, FIIs reduced stake in ITC to 14.63% in March from 17.01% in year-ago period.
Most of the cut in FMCG sectoral basis is led by ITC, said Deepak Jasani, Retail Research Head, HDFC Securities. “Foreign investors are driven by ESG norms. They are conscious and are gradually making investment decisions based on ESG compliance and carbon footprints. This is one of the key reasons for ITC to see a cut in FII holdings," Jasani saud. Environmental, social, and governance (ESG) refer to three central factors in measuring the sustainability and societal impact of an investment in a company or business.
Pharma companies may have seen lower FII stake because of company specific reasons such as run-ins with the US Food and Drug Administration, according to Jasani. In the pharma sector, FIIs cut stake in heavyweights such as Glenmark Pharmaceuticals Ltd, Biocon Ltd, Sun Pharmaceuticals Industries Ltd, Dr Reddys Laboratories Ltd, and Divis Laboratories Ltd.
Foreign investors are expected to evaluate how India unlocks business activities post lockdown, number of cases in the country and economic growth path before taking a long-term investment plunge into the country, said analysts.
“These are unprecedented scenarios and dynamic in nature. Against this backdrop, India would continue to witness rotational trend. Hence, bouts of sharp net outflows or net inflows cannot be overruled. One could expect this trend to stabilise when the situation on the coronavirus front normalises or shows signs normalisation," said Srivastava.