Foreign portfolio investors (FPIs) have reduced their exposure to India’s biggest listed companies significantly during the January-March period, bringing the foreign institutional ownership in Indian companies to a 25-quarter or six-year low.
At March-end, foreign institutional ownership for 308 firms in the BSE 500 index, which contribute at least 90% of India’s market capitalization, slumped to 12.3%.
The sell-off by FPIs, somewhat on slow burn due to steep valuations and poor macros, intensified following the covid-19 outbreak, slashing stakes more sharply in FMCG and pharma stocks.
This is in contrast to 14.16% stake held by FIIs in these companies in March quarter last year and 13.36% in 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," Himanshu Srivastava, senior analyst and manager research, Morningstar Investment Adviser India said.
He said that uncertainty over the possible impact of coronavirus pandemic on the global as well as domestic economy prompted investors to adopt a cautious stance towards emerging markets like India. Emerging markets are anyways considered as riskier investment destinations compared with their developed counterparts during crises of global proportions. “When there is a flight to safety or when risk-taking is off the table, investors usually shun them for greater certainty and shift their focus towards safe havens. This triggered an exodus of foreign investors from the emerging markets and India was no different," Srivastava added.
In the first three months of 2020, FIIs sold Indian shares worth $6.09 billion. They had got into a massive sell-off mode in March 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 FMCG and pharma stocks. In March, FPIs owned an aggregate 13.38% in FMCG stocks, down from 15.10% in the year-ago period. Similarly, foreign investors cut stakes in pharma stocks to 14.77% in March quarter from 17.04% in same quarter last fiscal. Analysts said sector specific reasons along with worries of slowdown led to such a sharp sell-off.
Among FMCGs, FIIs reduced stake in ITC to 14.63% in March from 17.01% in year-ago period. CCL Products (India) Ltd, Tata Consumer Products Ltd, United Breweries Ltd, Emami Ltd were few FMCG companies where FMCG reduced ownership in year-on-year basis.
Deepak Jasani, Retail Research Head, HDFC Securities said most of the cut in FMCG sectoral basis is led by ITC. “Foreign investors are driven by ESG norms. They are conscious and are gradually making investment decisions based on ESG compliance and carbon footprints. One of the key reason for ITC see cut in FII holdings," Jasani added. 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.
According to Jasani, pharma companies may have seen lower FII stake due to company specific reasons like run-ins with US FDA (food and drug administration). Among pharma sector, FIIs cut stake in heavyweights like 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 long-term investment plunge into the country, said analysts.
“These are unprecedented scenarios and dynamic in nature. With 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.