India's capital markets have caught the attention of foreign institutional investors or FIIs. Encouraged by signs of economic revival under the new government, they pumped in Rs 1,60,000 crore in Indian equity & debt markets between May 16 - when election results were announced - and November 12.
Of this, equities got Rs 50,600 crore. In the same period of the previous year, net FII inflows into equities were Rs 24,471 crore; there was a net outflow of Rs 80,377 crore from debt. "It appears that this time FIIs are here for the long haul," says Vikram Dhawan, director, Equentis Capital.
These inflows, and the resultant market rally, are happening at a time when countries across the globe are facing rough weather. Europe is struggling to come out of recession. Developing economies such as Brazil, China and Russia, too, are facing headwinds. Amid this, India is emerging as a favoured investment destination as the new government focuses on growth, economic reforms and business-friendly policies.
The benchmark index, the BSE Sensex, rose 32.49% to 28,008 this year till November 12. In comparison, Brazil's Bovespa and France's CAC 40 were up just 4.24% and 0.40%, respectively. The UK's FTSE 100 was down 1.35% while Germany's DAX fell 0.33%. Clearly, the Sensex outshone them all. On November 12, it closed above 28,000 for the first time.
Brokerages are bullish too. ICICI Securities sees the Sensex at 33,000 and the Nifty at 9,250 next Diwali, while UBS has said that the Nifty may touch 9,600 by December 2015.
Nilesh Shetty, associate fund manager, equity, Quantum Asset Management Company, says, "The strong election mandate substantially reduces political risk over the next five years. The perception that the new government is pro-business has increased India's potential. FIIs have increased exposure to India due to its attractiveness versus other emerging economies."
We analyse FII flows after the formation of the new government and sectors/stocks they are betting on.
There have been big changes in preferences of FIIs since last year. The financial services sector has emerged as the most favoured since May this year by attracting Rs 11,024 crore till October 15 as against an outflow of Rs 5,666 crore in this period previous year.
Telecom services has got Rs 7,375 crore since May 16, nearly 15 times more than the Rs 487 crore received in the same period last year. It is followed by pharma & biotech, which has attracted Rs 5,248 crore. It was a favourite last year also and attracted Rs 4,125 crore, the third among all sectors.
Software and services, the most preferred last year with net investment of Rs 3,535 crore, is at the fourth rank; it has got Rs 7,366 crore from FIIs.
Auto & auto component and oil & gas sectors are among the top six this year with FII investments of Rs 3,304 crore and Rs 2,409 crore, respectively.
Ravi Gopalakrishnan, head of equities, Canara Robeco AMC, says, "Companies with domestic-oriented models which lost momentum in the past two years are generating a lot of interest. Thus, automobile, financial services and capital goods have started getting FII money."
Let's see what is driving FII interest in the top five sectors in which they have invested this year.
According to data from NSDL, FII hold assets worth Rs 4,29,859 crore in banking and other financial services. NSDL is an equity market depository.
The BSE Bankex rose 55% to 20,117 this year till November 12, when HDFC Bank, Kotak Mahindra Bank, Federal Bank, ICICI Bank, IndusInd Bank and Axis Bank touched all-time highs.
According to experts, FIIs expect pick-up in economic growth to increase demand for credit. Besides, favourable macroeconomic variables such as plunging commodity prices, declining fiscal & current account deficits and falling inflation should trigger a fall in interest rates, which will be positive for the sector.
Between December 2013 and September 2014, FIIs increased their stake in Oriental Bank of Commerce (from 9.57% to 12.65%), ICICI Bank (38.39% to 41.08%), DCB Bank (11.94% to 14.84%) and Bank of Baroda (15.54% to 18%)
V Balasubramanian, head, equity and gold, IDBI MF, says, "Banking and finance sectors reflect the state of the economy. Hence, their shares will be the first to rise when growth picks up."
Dhiraj Sachdev, senior vice president and fund manager, equities, HSBC Asset Management (India), is bullish on private sector banks. "Private sector banks may grow by maintaining asset quality while state-owned banks may face the challenge of non-performing assets or NPAs. We expect NPAs of state-owned banks to peak out over the next one-two quarters and their G-sec investments to pay off as interest rates fall. While valuations are attractive, structural issues persist. Non-banking financial services, or NBFCs, may recover due to improvement in the commercial vehicle market and higher home mortgage volumes. Other financial services businesses like microfinance, broking and insurance, too, should show better growth."
Shares of telecom service providers Bharti Airtel, Idea Cellular and Tata Communications rose 16.5%, 15.30% and 47%, respectively, after May 16 till November 12.
Mariam Mathew, associate vice president and head, Chola Securities, says, "The telecom sector is turning around as competition ebbs and realisations improve due to trimming of promotional offers and discounts. The increase in the share of value-added services, or VAS, has resulted in a rise in revenue per minute or RPM."For instance, Airtel's RPM rose from Rs 0.44 in the second quarter to Rs 0.47 in the third quarter. The share of VAS revenue rose from 16.5% in July-September 2013 to 20.2% in July-September this year. Idea's RPM rose from Rs 0.44 to Rs 0.46 while VAS revenue share went up from 16.1% to 21.1% from July-September 2013 to July-September this year.
"Reduction in the number of players gave pricing power. This boosted sentiment. Now a lot depends upon the upcoming auction of spectrum. Idea Cellular can give up to 40% returns in the next 12 months," says Prakash Diwan, director, Altamount Capital Management.FIIs increased their stake in Bharti Airtel and Idea Cellular from 15.92% to 17.91% and 19.06% to 24.96%, respectively, between December 2013 and September 2014.
An Edelweiss Securities report says that in the near to medium term the sector will be buoyed by better-than-expected realisations and surge in volumes. Exponential surge in data use and fewer promotional offers will help companies increase cash flow and, thereby, pare debt.
The BSE Healthcare index rose 44.72% to 14,940 between May 16 and November 12. Torrent Pharmaceuticals, Glenmark Pharmaceuticals, Cadila Healthcare, Aurobindo Pharma, Ranbaxy Laboratories, Sun Pharmaceuticals and Lupin touched all-time highs in November.
"We continue to remain positive on Indian pharma companies due to growth in the US generic market through new launches. We expect generic injectables, dermatology, controlled substances and oral contraceptives to remain medium-term growth drivers there. We also expect more acquisitions and believe that a higher share of revenue from India and other emerging markets will support growth," says a UBS report. FIIs increased stake in Aurobindo Pharma (from 21.17% to 23.74%), Natco Pharma (11.46% to 16.63%) and Torrent Pharmaceuticals (10.54% to 12.83%) in the four quarters till September this year.
Software and Software Services
With the domestic economy reviving and the US financial system finding its feet, IT budgets of companies are likely to increase, benefiting Indian software companies.
DK Aggarwal, chairman and managing director, SMC Investments and Advisors, says, "Strengthening dollar will also increase revenues of IT companies in rupee terms."Recent quarterly numbers by IT giants proved that the sector is on a strong wicket. Infosys and HCL registered net profits of Rs 3,096 crore (up 7.27%) and Rs 1,874 crore (up 2.06%), respectively, compared to the quarter ended June 2014. Infosys and TCS have also taken steps to reward their shareholders. Infosys, for example, has declared a big dividend, while TCS has announced the merger of subsidiary CMC with itself, which will add to shareholder wealth. Since May 16, the BSE IT index has risen 20%; it was at 10,762 on November 12. It touched an all-time high of 11,001.13 on October 7.
Between December 2013 and September 2014, FIIs increased their holding in HCL Technologies and eClerx Services from 28.05% to 29.10% and 26.21% to 29.22%, respectively.Aggarwal says, "IT will continue to do well. Even though the stocks are near all-time highs, valuations are attractive. For example, Infosys, at Rs 3,946, is trading at a price-to-earnings, or P/E, ratio of 19.88 on the basis of trailing 12-month earnings, below its four-year average of 23.54. The performance will improve further as investments pick up and economic reforms by the government start having an impact."
Sachin Shah, fund manager, Emkay Investment Managers, says, "IT companies have strong balance sheets. Recovery in the US will also benefit them."
Automobile and Auto Components
FIIs raised stake in Amara Raja Batteries (13.35% to 18.07%), Gabriel India (5.61% to 7.85%), TVS Motor Company (3.35% to 11.64%) and Suprajit Engineering (1.88% to 3.84%) in the four quarters till September.This year, the BSE Auto index rose 52% to 18,617.56 till November 12. Bharat Forge surged the most (176.6%) to Rs 908.30. It was followed by Eicher Motors (163.5% to Rs 13,158.70), Apollo Tyres (129% to Rs 240.15) and Motherson Sumi (123% to Rs 428.60).
"The passenger vehicle segment is poised to post double-digit growth over the next two years given the improved consumer sentiment and economic outlook," says a report by Angel Broking. The Society of Indian Automobile Manufacturers has estimated 5-10% growth in passenger car sales in 2014-15. In 2012-13, domestic sales were 178.16 lakh as against 96.54 lakh in 2007-08.Shah of Emkay says, "Valuations are comfortable. Two-wheeler demand has also picked up, though demand for commercial vehicles is yet to revive. We are positive on the sector."
Oil & Gas
FIIs are upbeat on oil & sector companies due to increase in the government-mandated price of natural gas and deregulation of diesel and petrol prices. Their exposure to oil & gas companies was Rs 1,07,995 crore on October 15 this year as against Rs 81,927 crore a year ago.
Reforms and FII inflows helped the BSE Oil & Gas index rise 24% to 10,901 between January 1 and November 12.
Shetty of Quantum says, "A significant part of policy expectations has been realised and so outperformance from current levels may be limited."
We discuss stocks that have been top FII favourites and see if it still makes sense to invest in them.
ICICI Bank: FIIs increased their stake in the bank from 38.39% at the end of December 2013 to 41.08% in September 2014. The stock rose 55% from Rs 1,098.45 on December 31 to 1,706.40 on November 14.
The bank made a net profit of Rs 2,709 crore in the quarter ended September, up 15% from Rs 2,352 crore in the same quarter a year ago.
Experts are bullish on the stock. SM Sakthi Prakaash, senior analyst, Wealthrays Securities, says, "ICICI Bank is trading at a discount to peers. Net profit is expected to increase while asset quality is expected to improve further." On November 12, it was trading at a PE of 18.72 as against the industry average of 19.95.
VK Vijayakumar, investment strategist, Geojit BNP Paribas, says, "ICICI Bank is well-placed to ride the cyclical upturn in credit growth. A return of more than 20% a year is possible in the next two years."
Persistent Systems: The company develops and maintains software systems/solutions and new applications and enhances the functionality of existing software products. Its stock rose 33% to Rs 1,306 this year till November 12. Between December 2013 and September this year, FIIs increased their holding from 17.80% to 27.71%.
Vijayakumar of Geojit BNP Paribas says, "Persistent is a strong player in the IT space with unique offerings. It has good growth potential and is reasonably priced. We expect over 20% annual returns from the stock."
For 2013-14, it reported gross sales and net profit of Rs 1,669.15 (up 29%) and Rs 249.28 crore (up 33%), respectively, from Rs 1,294.51 crore and Rs 187.62 crore, respectively, in the year ended March 2013.
The management has said that revenue growth in 2014-15 will be better than in 2013-14 (15.2%). Sharekhan expects the stock to touch Rs 1,400 in the next few quarters.
LIC Housing Finance: The company reported an operating profit of Rs 2,583 crore in the quarter ended September this year as against Rs 2,195 crore in the same quarter a year ago. Net profit rose 10.09% from Rs 310.07 crore to Rs 341.35 crore. Between December 2013 and September 2014, FIIs increased their stake from 35.71% to 38.39%. The stock rose 74% to Rs 382.40 this year till November 7.
"Likely economic revival and pick-up in the mortgage finance business will be positive for the company. We expect it to report 19.5% a year earnings growth between 2013-14 and 2015-16," says a Sharekhan report.
Amtek Auto: The stock of this maker of automobile parts rose 165% to Rs 198.95 this year till November 12. FIIs increased stake from 26.34% in December 2013 to 32.56% at the end of September this year. Prakaash of Wealthrays is bullish on the stock. "The company has seen steady growth in the last couple of quarters. This is expected to continue for the next 18 months due to growth in two-wheeler and passenger vehicle segments."
Torrent Pharmaceuticals: Torrent is a big player in cardiovascular and central nervous system segments. FIIs increased stake from 10.54% at the end of December 2013 to 12.83% on November 12 this year. The stock rose 105% to Rs 966.65 this year till November 12.
Gaurav Jain, director, Hem Securities, says, "Strong pipeline of products for the US market and fundamentals will help the company grow manifold. We believe the stock can touch Rs 1,400 in the next 24 months."
The company reported a net profit of Rs 663.91 crore in 2013-14, up 52.65% from Rs 434.91 crore in 2012-13.
Idea Cellular: Idea, a part of the Aditya Birla Group, is India's third-largest wireless operator.
The company recently raised Rs 3,750 crore through a qualified institutional placement issue and issuance of preference shares to bid for the upcoming spectrum auctions. Nine circles in which Idea has spectrum in the premium 900 MHz band will see bidding wars between December 2015 and April 2016.
Edelweiss says higher tariffs will boost cash flow and reduce debt of telecom companies. In case of Idea, it estimates a cash flow of Rs 16,700 crore between 2014-15 and 2019-20. It believes the stock can touch Rs 180 in the next few quarters. On November 12, it was at Rs 164.60.
Diwan of Altamount Capital Management says, "Idea can give up to 40% returns in the next 12 months." FIIs increased stake from 19.06% in December 2013 to 24.96% at the end of September 2014.
HDFC: HDFC's assets were Rs 2,38,363 crore in the quarter ended September 30, up 13% from Rs 2,11,759 crore in the year-ago period.
FIIs raised stake in the lender from 74.25% to 80% between December 2013 and the September quarter. Experts expect double-digit growth in net profit in the coming years. According to a report by Firstcall Research, net sales and net profit are expected to grow at 14% and 12% a year, respectively, between 2013 and 2016.
Motilal Oswal believes the stock will touch Rs 1,185 in the next few quarters. It rose 44% to Rs 1,142 this year till November 12.
Justdial: The company provides search services in India and abroad through multiple platforms such as internet, telephone and SMS. It enjoys a first-mover advantage among consumers seeking information about local businesses. It had 14.5 million listings and an SME (small and medium enterprises) database of more than 2,000 cities as on September 30. It has also launched Just Dial Search Plus, which sells things such as groceries, wine and electronic goods, besides offering services such as booking taxis and appointment with doctors.
FII stake rose from 22.98% in December 2013 to 26.64% in September 2014. The stock rose 4% to Rs 1,495.85 this year till November 7.
Motilal Oswal Securities says Justdial is trying to expand globally, the full benefits of which will be visible in three-five years. The brokerage believes the stock can touch Rs 1,800 in the next few quarters.
Justdial's net profit in 2013-14 was Rs 120.61 crore as against Rs 1.79 crore in 2006-07.
Balkrishna Industries: The company produces off-highway tyres. These include tyres for use in agriculture and material handling vehicles and earth movers. It supplies to all major construction equipment makers in the country. It is also present in the replacement market of the road construction sector.
FIIs increased their stake from 10.13% in December 2013 to 12.56% in September 2014. The stock rose 140% to Rs 815 this year till November 7.
Premal Madhavji, head of equities, India, Espirito Santo Securities, says, "We expect the performance to continue due to uptick in demand in the global market. This will lead to 14% a year volume growth and 18% earnings growth between 2013-14 and 2015-16. We like the company's offerings and focus on the overseas replacement market. The demand in the US, a big market for off-highway tyres, is also expected to pick up, benefiting the company."
The company is tapping new markets in Canada, Mexico, Russia and the CIS. The share of radial tyres will rise from 30% to 35-40% once the Bhuj plant is operational in 2015-16. "This should help operating profit margins as radial tyres have 4-5% higher operating profit margins than bias tyres. Overall, the management is looking at an operating profit margin of 25% (24% in 2013-14)," says Madhavji.
The company registered a net profit of Rs 488.37 crore in 2013-14, up 37.25% from Rs 355.83 crore in 2012-13.
Prism Cements: Strong revenue and volume growth in cement, tiles, bathroom and kitchen segments indicates that operational issues are now behind Prism Cements. FII holding rose from 2.66% in December 2013 to 3.76% in September this year. The stock rose 183% to Rs 77.30 this year till November 7.
"Prism's coal block was cancelled in the quarter but access after the auction (planned early next year) or linkage can boost cement margins. With no major capital expenditure planned for 2014-15 and 2015-16, we expect the deleveraging theme to play out, which in turn will improve the return profile. We expect margins to improve in 2015-16 and 2016-17 as construction demand revives and cost saving measures gain traction," says Madhavji.The company is working to diversify its revenue stream. "We expect that foray into the unorganised and underpenetrated bath and kitchen segment will not only secure alternative profitable revenue streams but also optimise return ratios by leveraging the existing distribution network," says Madhavji.
Should You Follow FIIs?
On, November 7, there were 111 companies in the BSE 500 index in which FIIs increased stake in every quarter from December 2013 to September 2014. Of these, 106 gave positive returns during the period.
Some of these companies are JK Lakshmi cement (stake increased from 5.52% to 10.85%), GATI (0.07% to 8.09%), DCM Shriram (0.56% to 1.01%), TVS Motor Company (3.35% to 11.64%) and Atul Limited (1.41% to 4.72%). These gave over 100% returns this year till November 12. For details on more such companies, see Apple of the Eye.
Apple of The Eye
There are 111 companies in the BSE 500 index in which FIIs increased stake from December 2013 to September this year. Of
these, 106 gave positive returns during the period. We bring you a snapshot of 20 of FIIs' top holdings.mosimage
Gaurav Jain, director, Hem Securities, says, "Following FIIs' investing pattern is good for active and disciplined investors as FII decisions are backed by indepth research and they are generally little ahead of the curve."
Though this increases the probability of making gains, it does not guarantee profits. For instance, Bombay Rayon Fashions, Reliance Communication, Swan Energy, Sun TV Network and Den Network dipped 24% to Rs 140.30, 18% to Rs 106.85, 16% to Rs 55, 14% to Rs 327.80 and 2% to Rs 158, respectively, between 31 December 2013 and November 12 this year spite of the fact that FIIs were positive on them.
Vinay Khattar of Edelweiss says, "Investors should keep track of buying by FIIs but not follow them blindly. Investments should be based on the individual's risk appetite and time horizon. The pros of following FIIs are that the investor may gain in the short term. However, if one follows FIIs without studying the fundamentals of the company, it may lead to losses in the longer term."
SM Sakthi Prakaash, senior analyst, Wealthrays Securities, seconds Khattar. "Investors should not blindly follow FIIs. They should do their own analysis and use information about FII investments as just an additional input."