Foreign institutional investors, or FIIs, are playing hot and cold with Indian equities. After pumping in a massive Rs 43,950 crore during the first three months of 2012, FIIs withdrew Rs 1,958 crore during April-June. With financial musclepower at their command, they have a large say in determining the direction of the market. But, do they have a similar influence on individual stocks that emerge as their favourite buys, where their collective holding shows an increase?
If one looks at aggregate FII investment during 2011-12, it would appear that stock prices in general react positively when FIIs buy into them and slide when they exit.
An analysis of FII purchases and sales during the year shows that of the 79 stocks in the BSE 500 index in which foreign institutional investors increased their holdings, prices of 53 stocks saw an increase.
The BSE 500 index accounts for over 94% of the market capitalisation of the Bombay Stock Exchange. During 2010-11, there were 108 stocks in which FIIs increased their stakes. Of the 79 stocks in which FIIs have raised their stakes in 2011-12, 19 also figured in 2010-11.
However, when analysing individual stocks, it is clear that one should not blindly purchase stocks in which FIIs are increasing their stake. In fact, of the top five stocks in which FII holdings have gone up the most in 2011-12, prices of two, Voltamp Transformers and HDFC, showed a decline during the year.
While FII holding in Voltamp rose by 8.22% from 24.13% in June 2011 to 32.35% in March 2012, the price fell by 8.34% from Rs 563 to Rs 516. In HDFC, FIIs ramped up their holding by 8.12% from 59.12% to 66.24% while the stock fell by 4.6% from Rs 706 to Rs 673.
However, it is not clear from the data the price levels at which FIIs increased their holding in stocks.
At the extreme end of the price fall where FIIs have raised holding are KGN Industries and Manappuram Finance. KGN Industries and Manappuram Finance declined 77% and 54%, respectively, during 2011-12.
There are also stocks whose prices have more than doubled when FII holding increased. The price of Amtek India, in which holding went up from 5.37% to 18.27%, the price rose by 162%, the price of Kajaria Ceramics jumped 129% with FII holding going up from 5.08% to 8.64%, VST Industries from Rs 643 to Rs 1,457 with FII holding going up to 2.94% from 0.50% and Jubilant Foodworks going up from Rs 556 to Rs 1168 with FIIs raising their holding from 33.44% to 37.89%.
Data indicates FIIs are bullish on banking, cement and construction material and pharmaceutical stocks as in 2010-11. However, they prefer private sector banks to public sector banks now.
There are six stocks from the pharmaceutical sector and five each from private banking and cement and construction materials sectors in which FIIs increased their holdings in 2011-12.
Private sector banks which are in favour are South Indian Bank, City Union Bank, ING Vysya, HDFC Bank, Federal Bank and Kotak Mahindra Bank. Cement sector stocks include Ultratech, ACC and Rain Commodities, while Strides Arcolab, Glenmark Pharma, Sun Pharma, Lupin, Dr Reddys Labs and Sanofi India remained favourites in the pharma sector.
“FIIs are showing interest in private sector banks as they are secular growth stories and are relatively better investment options as compared with PSU banks in an environment where asset quality is the reason for stress on banking,”says says Gaurav Dua, head of research, Sharekhan.
Dinesh Thakkar, chairman and MD, Angel Broking, says, “The pharma sector is a high return on equity generating business in India. So FIIs would invest in it. On the other hand, the cement and construction materials sector has been beaten down significantly and hence shares were available at attractive valuations.”
Vinod Sharma, business head, wealth management, HDFC Securities, explains, “FIIs can turn positive on Indian markets if the government revokes the generalanti-avoidance rules and takes steps, such as increase in diesel prices, to reduce fiscal deficit.”
But should you follow FIIs? Experts say there are better ways.“Buy stocks where the promoters are increasing their stake through buyback or creeping acquisition regularly. That reflects management confidence in own company,”says Gaurav Dua of Sharekhan.