Keep a watch on institutional positions

Use institutional presence as your first selection filter for small-cap stocks

The attitude divergence between foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) has been marked in the current fiscal year. While FPIs have sold Rs 501 billion of equity since April, DIIs have bought Rs 843 billion.  The FPIs have obviously been spooked by macro factors like rising crude prices, a weak rupee, which impacts their returns especially severely, and a rising fiscal deficit. The FPIs can also pick and choose their markets and they have chosen to curtail their rupee exposures, selling debt as well. 

Whatever domestic institutions may think about these macro-factors, there has been a continuous surge of inflows to equity mutual schemes from retail investors. That has compelled fund managers to keep pumping funds into the market. 

The attitude divergence also extends to the sort of stocks that the two sets of institutional investors choose to hold. At the top end of the market, both sets of institutions have stakes in more or less every stock listed in the F&O segment. Of course, exposures differ, but divergences are not so easy to map. 

However, when we look at small caps, the attitude differences become more obvious.  The top ten small cap holdings (as of November 2018) were very different. In aggregate, DIIs held in descending order:  Equitas Holdings (highest exposure, with aggregated DII holdings of 37 per cent equity), Ashoka Buildcon, ITD Cementation, NCC, CG Power, KNR Construction, Strides Pharma, Apar Industries, HSIL and Inox Leisure (least exposure with aggregated holdings of 20 per cent).  

In that lot, there's one pharma company (Strides) and one media/entertainment stock (Inox). There is a financial holding company (Equitas).  The rest are construction, infrastructure,  and capital goods (CG Power, Apar).  There is a clear bias there in weightage and exposure. 

The FPIs, on the other hand, don't have major stakes in the DII Top Ten. The top ten FPI holdings for smallcaps consist of KPIT Techno (highest aggregate at 48 per cent of equity held by FPIs),  Care Ratings, TeamLease Services,  Cox & Kings, Healthcare Global, Gayatri Projects, Redington, JustDial , Gateway Distriparks, and Persistent Systems (aggregate of 26.5 per cent) . 

That's a far more varied list and it doesn't seem to have much infra or construction exposure.  Gayatri Projects is the only infra company. There are two IT companies (KPIT, Persistent). There's a rating agency - Care has been the beneficiary, if that is the right word, of a bidding war between wannabe acquirers. 

TeamLease is an HR-related concern, which offers a variety of employment-related services. Cox & Kings is hospitality and tourism. Healthcare Global specialises in cancer related medical and health services. It also provides assisted fertility services.  JustDial needs little introduction to the digitally-savvy. Redington calls itself a supply chain solutions provider — it trades goods and services through a very complex chain of subsidiaries and partners.  Gateway Distriparks is a logistics service provider. Obviously, these are aggregates and every individual FPI has a different profile. Also, small-caps represent a small component of overall equity exposure, consisting of about 10 per cent of total market cap, almost by definition.  

But purely as a thought experiment, assume that these were two portfolios held by individual entities, focussed on smallcaps. The DII portfolio is heavily concentrated in one sector. If infra and construction sees a big push, it may yield huge returns. If infra and construction doesn't perform, and fairly soon at that, this portfolio will also seriously underperform. Infrastructure performance always depends on policy and political stability, which is a question mark for the next six months. 

The FPI portfolio is much more diversified. It is more consumer-focussed and consumption has been a profitable theme for decades. The FPIs also have larger exposure to rupee weakness, with the IT component. Under normal circumstances, it looks safer because it won't depend on one sector to deliver huge returns. 

Each of these companies is worth studying, simply because analytical teams have looked at them in detail. Information about small companies is sparse. One might use institutional presence as first selection filter. Due to small floats, institutional positions lead to volume-price spikes and this offers useful triggers for small investors. You can hold, so long as the big guy is holding and institutional sales are obvious due to the impact on price and volume.