FII Holdings: Key To Identifying Growth Stocks

Some of the key takeaways from FII actions can be used smartly while constructing a diversified portfolio. Advait Dharmadhikari observes the trend in FII investments in the Indian markets and identifies the sectors that FIIs are overweight on...




India has long been one of the favourites of the foreign investors. What has attracted foreigners is the fact that no other market offers high growth at reasonable prices like India offers. Ever since FIIs have been allowed to invest in India, their dominance in the Indian equity market has been high. India has always been a capital-hungry market and, to an extent, the Indian market has been dependent on foreign capital for its development.

It is only lately, with strong emergence of the domestic institutional investors, that the dependence on the FII money has been reduced for India. But in spite of reduced dependence, the fortunes of Indian markets are influenced by the actions of FIIs.

The FII money into Indian markets is a crucial element which none of the investors can afford to ignore. Investors who track FII investments will always remain at an advantage vis-a-vis others who do not do so.

Rishabh Jain, who has been tracking markets since 2000, says, “While studying Indian markets, one of the key things I observe is what are FIIs buying and selling. It is not that I buy what FIIs buy and sell what FIIs sell. It's just that it is comforting to know that FIIs are increasing their stakes in the stock that I already hold.”

It is always handy to know the FIIs inflows, which sector the investments are pouring in and which stocks are preferred by the FIIs.



FIIs invest in banking stocks :-

The FII flows into Indian markets rose to a 15-month high in February after the RBI indicated interest rate cuts in the future. The foreign investors invested nearly $2.4 billion in the equity market in February. Foreign investors turned net buyers of banking stocks for the first time in several months and deployed 60 per cent of the funds or $1.3 billion into the sector. The sector received the highest monthly foreign inflow in two years. Indian equities continue to attract significant amount of overseas funds, putting to rest several market players' fears that the election uncertainty could cause a dip in the inflows into India.

The sudden increase in crude oil prices beyond $75 a barrel resulted in a slight moderation in the flow of foreign funds. In March, India saw the highest monthly inflows in two years at Rs. 42,700 crore. In April, this number slipped to Rs. 11,600 crore.

On a year-to-date basis, India remains the leader among emerging markets in drawing foreign inflows at $9.9 billion. In the backdrop of election uncertainty, the decision by the FIIs to continue buying



into Indian stocks reflects their confidence in the Indian economy.

The financials continued to remain the FII favourites, with banks attracting the highest inflows, followed by NBFCs. Electric and other utilities saw inflows of $78 million, whereas chemical and petrochemical stocks saw inflows of $50 million dollars. The telecom witnessed healthy inflow of $33 million. The insurance and coal sectors saw inflows of $18 million and $15 million, respectively.

On the other hand, food, beverages and tobacco sectors saw the highest net investment outflow of $143 million. This was followed by household and personal products with an outflow of $56 million and automobile sector which saw an outflow of $47 million. The retail sector witnessed sharp net outflows of $28 million.



The March quarter shareholding data clearly indicates that foreign investors have shown strong interest in the beaten down pharma sector and NBFC stocks and select lenders from the banking sector as a whole showed a revival. Solara Active Pharma, the demerged entity of Strides Pharma Sciences, saw interest from the FIIs as they raised stake in the firm to 17.4 per cent in March quarter from 16.2 per cent at the end of December 2018. The stock is up 23.68 per cent on a YTD basis. The vertically integrated pharma player saw the FII holding rise to 12.8 per cent from 9.7 per cent. Divi's Labs witnessed significant interest from the FIIs with an increase of 1.2 per cent QoQ in shareholding. The stock returned 17.88 per cent. The Indian pharmaceutical sector faced several headwinds throughout the calendar year 2018 due to heightened regulatory and policy headwinds.



From the NBFC sector, the FII shareholding in Ujjivan Financial Services increased 4.94 per cent in the March quarter to 13.71 per cent from 8.77 per cent. The stock has delivered a YTD return of 19.27 per cent. Among other NBFCs that saw an increase in FII holdings, Muthoot Finance and Repco Home Finance saw an increase of 1.35 per cent and 2.06 per cent, respectively. Some banks that saw an increase in shareholding by the FIIs were Axis Bank and Lakshmi Vilas Bank. The FIIs increased stake in Axis Bank by 2.43 per cent. Axis Bank is coming out of its stressed asset problem and has delivered 22.21 per cent return on a YTD basis.

Lakshmi Vilas Bank, which is set to merge with Indiabulls Housing Finance, witnessed interest from the FIIs which bought 12 per cent of the company’s shares in the March quarter. Some other stocks that saw FII holdings increase by more than 1 per cent include NCC, which delivered 11.58 per cent return on a YTD basis and saw an increase of 3.98 per cent by the FIIs.

When promoters of a company increase their stakes in their company, it is generally considered a positive signal for the investors. However, when promoters, FIIs and DIIs all show confidence in select stocks, it inspires tremendous confidence among investor community. Following are some of the stocks that have seen an increase in the promoter shareholding, FII shareholding as well as mutual fund holdings in the recent quarter:

Just Dial saw the FII stake in the company increase by 7.26 per cent, whereas the promoters and mutual funds raised their stakes in the company marginally by 0.08 per cent and 0.01 per cent, respectively. The stock returned a handsome 17.26 per cent on a YTD basis. Reliance Industries’ promoters hiked stake in the company by 0.08 per cent.

Mutual funds and FIIs raised stakes in the company by 0.24 per cent and 0.37 per cent, respectively. The stock has been one of the star performers in 2019 and has delivered a YTD return of 25.33 per cent. Plastiblends India saw its promoter increase stake increase by 0.2 per cent and mutual funds and FIIs hiked stakes in the company by 0.07 per cent and 0.02 per cent respectively. The stock has delivered a YTD return of 8.73 per cent.

Conclusion :- There is consensus amongst the global equity analyst fraternity on the outperformance of the equity markets in the emerging markets. Within the emerging market space, India remains the most definitive growth story, even though the valuations are looking stretched. The FIIs will continue to park their money in India owing to their appetite for growth. The lower interest rate environment, continuity of sound economic policies, demographic dividend, increased productivity and the expected long-term economic growth will accentuate foreign flows into Indian markets.

Investment is always analysed on a relative basis. How much money comes into Indian markets is also a factor of how the developed markets and other emerging markets are performing and the valuations at which they are trading. So, it becomes important to track developed markets to really understand the FII behaviour.

FIIs generally invest in quality companies with ample liquidity. The stocks where FIIs have increased their shareholding significantly have delivered handsome returns for the investors. FIIs have recently shown an interest in beaten down pharma names and banks and select NBFCs. Investors can use the FIIs sectoral preference as a guide while constructing their portfolios.

The FIIs will continue to park their money in India owing to their appetite for growth. The lower interest rate environment, continuity of sound economic policies, demographic dividend, increased productivity and the expected long-term economic growth will accentuate foreign flows into Indian markets.

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