When in doubt, just sell. That seems to be the formula of foreign institutional investors (FIIs) these days. While a lot has happened over the past couple of days, an analysis of ownership patterns in Indian equities in the first quarter of 2011-12 suggests FIIs have been bracing for this turmoil in advance.
A large portion of the EPS (earnings per share) of companies comprising the Nifty, the National Stock Exchange’s 50-share benchmark index, comes from global operations. Between April and June, FIIs have been reducing their exposure to such companies, whose earnings are subject to cyclical variations, as they are likeliest to be worst hit by the global slowdown.
According to Credit Suisse, nearly 50 per cent of the globally-linked Nifty EPS, “largely uncut so far”, may see downward revisions. And, 2011-12 growth can fall to eight per cent from the current 17 per cent. Explains Kislay Kant, head of research at MAPE Securities, “Other than the consumption sectors, there are chances of earnings de-growth (meaning, a fall) in other sectors, which is why FIIs are in selling mode.”
An analysis by Edelweiss Capital of the ownership pattern of the 100 companies on the Bombay Stock Exchange comprising its BSE 100 index indicates that while there’s reasonable stability in the broader ownership pattern on a sequential basis, divergences between FIIs and domestic institutions within sectors continue. Within the FII portfolio, the share of the FMCG sector rose 120 basis points in the first quarter of 2011-12, while the share of banking and financial services fell 100 bps sequentially. Despite this selling, BFSI (banking, financial services and insurance) continued to be a key overweight, while FMCG remained an underweight. One reason for the FMCG sector’s under-representation is the underweight position of ITC within this portfolio.
On an average price basis, Edelweiss Capital’s research estimates the highest FII selling within the BSE 100 universe in the first quarter of 2011-12 has happened within the BFSI and energy sectors, while the highest buying was visible in the consumer and software space. As the situation evolves further, some of these calls may change as well. But current estimates suggest that State Bank of India and Axis Bank within BFSI, and RIL and Cairn India within the energy sector are stocks in which FIIs have reduced their positions. Explaining this pattern, Gopal Agrawal of Mirae Asset Management, says: “Foreign investors are concerned about global macro-economic indicators and whenever they sense a problem, they tend to exit. They have exited financials in India primarily due to the NPA (non-performing assets) cycle and sectors linked to global growth.”
So, what is not finding favour with the FIIs? Any sector or company that is global in nature is a strict no-no. The consumer sector, which on average accounted for almost 8.8 per cent of the total institutional portfolio over the preceding three quarters, now accounts for 10.3 per cent. That’s going defensive with a vengeance.
| CONSUMPTION PLAYS IN DEMAND | |||||||
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Top FII overweight stocks |
Top DII overweight stocks | ||||||
| *BSE 100 | FII Stake% | *Relative | *BSE 100 | DII Stake % | *Relative | ||
| HDFC | 4.30 | 7.70 | 3.30 | ITC | 5.10 | 10.10 | 4.90 |
| Infosys | 6.60 | 7.80 | 1.20 | L&T | 4.70 | 7.30 | 2.60 |
| Bharti Airtel | 2.50 | 3.40 | 0.90 | SBI | 3.20 | 4.80 | 1.60 |
| Coal India | 1.20 | 2.00 | 0.90 | GAIL | 1.00 | 2.60 | 1.50 |
| Axis Bank | 1.60 | 2.40 | 0.80 | NMDC | 0.50 | 1.50 | 1.10 |
| Hero Honda | 0.90 | 1.60 | 0.70 | ONGC | 2.20 | 3.10 | 0.90 |
| Adani Ent | 1.00 | 1.70 | 0.70 | Tata Steel | 1.90 | 2.70 | 0.90 |
| TCS | 3.20 | 3.80 | 0.50 | NTPC | 1.40 | 2.30 | 0.80 |
| JSPL | 1.30 | 1.80 | 0.50 | BHEL | 1.60 | 2.30 | 0.60 |
| United Spirits | 0.40 | 0.80 | 0.40 | Tata Power | 1.00 | 1.60 | 0.60 |
| DII: Domestic Institutional Investor; FII: Foreign Institutional Investor * Weight in % Source: Edelweiss Capital, CMIE, Bloomberg, Universe is BSE 100 | |||||||
Going out of favour are companies that are capital-intensive or require funding for projects. Echoing this trend is Credit Suisse in its strategy report dated August 18: “While the world over, the balance sheets of companies seem to have improved since the last crisis, the same has not happened in India. The increase in leverage has been far greater among the smaller companies – again, like for pledged shares, partly explaining the lacklustre performance of the small and mid-cap names. In fact, the number of companies with high leverage is now higher than it was in FY08.”
Therefore, it’s not surprising that the mid-cap and small-cap indices have seen a bloodbath in recent times. Given that banks globally are under pressure, companies looking to raise funds abroad are also going to see some trouble. This preference is reflecting in the valuations of companies, too. While financials and global cyclicals are coming off, consumer stocks have held on to their prices even in these turbulent times.
