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 per cent 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.
162 per cent
is the rise in price of Amtek India stock, in which FII holding went up from 5.37 per cent to 18.27 per cent
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 per cent from 24.13 per cent in June 2011 to 32.35 per cent in March 2012, the price fell by 8.34 per cent from Rs 563 to Rs 516. In HDFC, FIIs ramped up their holding by 8.12 per cent from 59.12 per cent to 66.24 per cent while the stock fell by 4.6 per cent 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 per cent and 54 per cent, respectively, during 2011-12.
129 per cent
is the rise in price of Kajaria Ceramics stock with FII holding going up from 5.08 per cent to 8.64 per cent.
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 per cent to 18.27 per cent, the price rose by 162 per cent, the price of Kajaria Ceramics jumped 129 per cent with FII holding going up from 5.08 per cent to 8.64 per cent, VST Industries from Rs 643 to Rs 1,457 with FII holding going up to 2.94 per cent from 0.50 per cent and Jubilant Foodworks going up from Rs 556 to Rs 1168 with FIIs raising their holding from 33.44 per cent to 37.89 per cent.SECTORAL WATCH
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.
127 per cent
is the rise in price of VST Industries stock with FII holding going up to 2.94 per cent from 0.50 per cent
"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.