Foreign institutional investors, or FIIs, have been the key drivers of Indian equity markets ever since they were allowed to invest here in 1992. Except 1998-99 and 2008-09, which were very difficult periods for the global economy, they have been net investors in Indian equities in all the years they have been present in the country. In these 22 years, the Bombay Stock Exchange (BSE) Sensex has risen from 2,000 to 21,000. This year, too, in spite of the near absence of buying from domestic financial institutions, FIIs had put in Rs 99,112 crore in Indian equity markets till December 4, pushing up the Sensex by 6% since January.WHAT'S IN IT FOR INVESTORS?
Let's see which stocks FIIs have been buying and selling in the last one year so that we can get hints about where to invest in 2014.
Before going into the specific stocks, let's ask experts if they expect more FII inflows in 2014?
That, experts say, will depend upon the results of the general elections next year and an event that world markets have been fearful of for the last few months-tapering of the quantitative easing, or QE, programme by the US central bank.
"We expect FII investments to continue in 2014, may be at a higher pace, if we get a stable government at the Centre. We feel QE tapering will not have any major impact on FII inflows into equities. We feel if outflows had to happen, they should have started, just like FII outflows from the debt market," says Sunil Jain, head, equity research, retail, Nirmal Bang Securities.
According to the Securities and Exchange Board of India data, as against net inflows of Rs 24,871 crore in equities, FIIs withdrew Rs 47,050 crore from the debt market in the five months between July and November. The reason is the fear over QE tapering.
"Elections will have a short-term impact on FII investments and can lead to equity markets reacting in a knee-jerk manner. However, we believe that FIIs will look at the long-term picture and chase growth. So, if we are able to deliver superior and stable growth compared to other emerging markets, we will continue to attract FII money," says Nagji K Rita, chairman & managing director, Inventure Growth and Securities.
Credit Suisse says elections and QE tapering will have a limited impact on India's economy and corporate earnings in 2014. They may cause volatility, but the market should revert to trend soon after, it says.
In the BSE 500 index, there are 120 stocks in which FIIs have been increasing their stake since the end of December 2012. Around 56% of these have given decent returns during the period. For instance, Ajanta Pharma rose 285% from Rs 254.60 on 31 December 2012 to Rs 985 on 3 December 2013, as FIIs increased stake from 1.34% to 2.27% (at the end of the September quarter). Similarly, Alembic Pharmaceuticals, Finolex Industries, PI Industries and Mindtree have risen over 100% this year till December 3 on the back of FII inflows.
Data show that FIIs have been upbeat on pharmaceutical, plastic product, auto, information technology, non-banking financial corporation, telecom and media sectors.
Vikram Dhawan, director, Equentis Capital, says, "FIIs will continue to increase exposure to FMCG, pharmaceutical and IT sectors. However, once there are signs of interest rates peaking, they may increase exposure to cyclical and rate sensitive stocks as well. Investors should keep an eye on such signals, as government banks may rally sharply then."INVESTMENT OPTIONS
We asked experts to pick their favourites out of the 120 companies in which FIIs have been increasing their stake since the end of December 2012.Havells India:
FIIs increased stake in the company from 19.96% in December 2012 to 30.91% in September 2013. The stock rose 17.7% from Rs 637.60 on 31 December 2012 to Rs 750.85 on 3 December 2013.
"Havells' domestic operations will maintain momentum in cash generation. Established products such as wires and lighting will help maintain turnover while newer products such as Reo switches and lighting fixtures will broaden the product profile and improve customer stickiness. Expansion of the product range and increasing penetration in the country's hinterland, coupled with good working capital management, should enable the company to maintain its premium valuation," says Sandeep Shenoy, executive director, institutional research, Anand Rathi Financial Services.United Breweries:
High barriers to entry are a big plus for the bigger players in the alcoholic beverages sector. United Breweries, the country's biggest maker of alcoholic beverages, is expected to benefit immensely due to this.
FIIs have increased their stake in the company from 18.23% in December 2012 to 19.13% in September 2013.
"The sector as a whole is likely to grow manifold in the next 5-10 years. The per capita consumption of spirits in India is among the lowest in the industrialised world and only better than that of underdeveloped and Islamic countries. Rising wages and young population mean demand should get support. While valuations are high, the United Breweries stock remains one of the most visible and well-placed to gain from the anticipated boom in the sector," says Dhawan of Equentis Capital.The India Cement:
The stock has been under pressure of late due to the controversy related to the IPL cricket team promoted by the company. It has fallen 35% from Rs 90.75 in December last year and was at Rs 58.90 on December 3 this year. Still, FIIs increased their stake in the company from 29.34% in December 2012 to 35.59% in September 2013.
"The stock is trading below intrinsic value. The current market capitalisation of Rs 1,700 crore does not represent the company's fair value. The stock had corrected in the backdrop of IPL issues, which should not affect valuations in the future. The India Cement is in talks to sell its Rajasthan plant for Rs 1,000 crore. The stock can touch Rs 95 by the end of 2014," says Kishor P Ostwal, chairman and managing director, CNI Research.
Over the past five years, the company has managed to transform itself from an API (active pharmaceutical ingredient) player to a formulation company. The stock used to trade at multiples of 16-18 times before 2011. However, it got de-rated after an alert by the US Food and Drug Administration on its unit VI and a warning for Unit III. This led to a fall in financial performance.
For financial year ended March 2013, the company reported a net profit of Rs 291 crore, as against a net loss of Rs 124 crore in 2011-12. On March 2013, its debtto-equity ratio was 1.32.
Jain of Nirmal Bang Securities is bullish on the company. "The stock is coming back into the limelight after the resolution of some key issues, which has led to an improvement in financials, both in terms of scalability and profitability. The US business is showing decent growth. The company also has a strong product pipeline," he says.
The company has given guidance for $2 billion (Rs 12,400 crore) revenue and 20%-plus operating profit margins by 2015-16.
On December 3, the stock was at Rs 306. "The stock is trading at 11 times and 9 times 2013-14 and 2014-15 consensus earnings estimates, respectively, which is a big discount compared to peers," says Jain.Bajaj Finance:
FIIs increased their holding in the company from 14.66% in December 2012 to 19.76% in September 2013. The stock is up 62% this year till December 3. The company reported an operating profit of 639.73 crore in the quarter ended September 2013 as against Rs 602.20 crore and Rs 570.08 crore in quarters ended June 2013 and March 2013, respectively.
"Bajaj's rural foray will augment customer base significantly and drive 26% a year loan growth between 2012-13 and 2015-16. Good risk management based on credit scorecards, high NPA (non-performing asset) coverage of 80%, Tier-I capital of more than 15% and shift to secured lending will keep credit costs under check. The company is well-placed to get a banking licence as it has a customer base of more than eight million. Healthy loan growth, rising proportion of secured loans in the loan book and higher productivity will drive annual return on assets of more than 3.3% and return on equity of 20% between 2013-14 and 2015-16," says Shenoy of Anand Rathi Financial Services.Idea Cellular:
IS THE NUMBER OF STOCKS OUT OF BSE 500 IN WHICH FIIs HAVE INCREASED THEIR STAKE SINCE THE END OF DECEMBER 2012
The stock rose 69% from Rs 103 on 31 December 2012 to Rs 175 on 3 December 2013. FIIs raised their stake in the company from 15.67% to 17.30% during the period.
Experts say telecom companies are getting back pricing power. This will help them improve margins.
"We expect tariffs to rise further in 2014. The company has better operating margins and lower debt compared to peers and is thus better placed to benefit from higher tariffs," says Dhawan of Equentis Capital.
"Idea is India's fastest-growing telecom company. Growth is expected to be 16% a year between 2012-13 and 2014-15, while profitability is expected to increase at a much faster pace of 27%. Idea's balance sheet metrics are the best-in-industry, with net debt-Ebitda ratio of just 1.3 times well below Bharti's 2.2 times), improving cash flow and high return on equity (RoE, likely to touch 16.3% in 2014-15 from 7.4% in 2012-13). The regulatory environment for telecom companies also seems be improving," says Jain of Nirmal Bang Securities.
Ebitda, or operating profit, stands for earnings before interest, tax, depreciation and amortisation.