FIIs rejig sectoral exposure ahead of Budget; pick pharma stocks, drop IT

Investors bet in anticipation of easing of regulatory issues in the pharma segment

Foreign institutional investors (FIIs) have rejigged their sectoral exposure ahead of the Union Budget, with overseas investors trimming their stake heavily in auto and ancillary companies, fast-moving consumer goods (FMCG), and the IT sector. They are picking stakes in pharma companies. 

An analysis of data sourced from Capitaline showed that FIIs had cut stake in a dozen FMCG names and 14 auto and ancillary companies within the BSE 500 universe.  According to market experts,  FIIs are trimming stake in the two sectors because of rich valuations in the FMCG segment and low visibility on recovery in the auto sector.

“In the FMCG segment, valuations have been a concern. Further, there are also fears that the sector could be subject to higher tax liabilities in the coming Budget. In the auto segment, there are dim chances of recovery in the second half of the calendar year, following the implementation of BS-VI norms,” said UR Bhat, director at Dalton Capital Advisors.

Meanwhile, FIIs have shown a differing stance on the so-called defensive sectors — IT and pharma.

In the pharma sector —which has seen a slew of regulatory issues from USFDA audits — FIIs have increased stake in 18 names. Meanwhile, they have cut stake in as many as 14 IT names.  

“In the pharma segment, FIIs seem to be betting in anticipation of easing regulatory issues. We are seeing these issues being addressed gradually,” Bhatt added.

Among prominent IT names, FIIs cut stake in Infosys by 1.75 percentage points, while marginally raising stake in TCS by 0.39 percentage points.

Market participants attribute FIIs’ reduction in stake in IT names to profit-taking. In the 3-month period, the Nifty IT Index has gained 8.5 per cent, while the frontline index Nifty has gained 2.9 per cent in the same period.

Meanwhile, mutual funds’ (MFs’) holdings have moved in different directions in some of the sectors.

In FMCG and auto and auto ancillaries, MFs have trimmed stake in lower number of companies — nine and ten, respectively, while increasing stake in a sizeable number of firms.

According to domestic fund managers, auto companies can offer investment opportunities. “ The auto sector should slowly start to look better as the low-base effect starts to play out,” said Mahesh Patil, co-chief investment officer-equity, Aditya Birla Sun Life MF.

Both MFs and FIIs have been heavy sellers of state-owned banks. MFs have cut stake in 11 such banks, while FIIs have trimmed exposure in 13 of these banks.

Analysts tracking the sector say that for a large section of PSU banks, asset quality issues have still not been resolved, which is keeping investors averse. On the other hand, FIIs have increased stake in 10 private banks, while MFs have raised stake in eight such banks.  Among PSU banks, Canara Bank saw the largest cut in FII stake (by 1.52 percentage points).

At the aggregate level, domestic institutional investors — including MFs and insurers — are showing increased influence in the broader market. Analysis of the data showed that the DII ownership of BSE 500 had increased 12.8 per cent in December quarter, which was the highest in nine quarters. FIIs’ ownership at the end of December quarter stood at 20.9 per cent.