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Srividhya Sivakumar

Not so long ago, FII interest in a stock was seen as a reason to add it to your portfolio. Now, with marquee names in the investment banking business — Merrill Lynch, Lehman Brothers, Morgan Stanley and Goldman Sachs — engulfed by the credit crisis, a sizeable holding by one of these crisis-ridden institutions is seen as a red flag.

The alacrity with which “Lehman” stocks have been pummelled to single-digit valuation multiples over the past few weeks and the widely circulating lists of ‘Lehman’, ‘Merrill’ and ‘Goldman’ stocks on blogs and investment groups force you to ask if you should stay well away from stocks fancied by these institutions. Given the ‘across-the-board’ selling by a few FIIs, should you give stocks with sizeable FII holdings a wide berth, moving, instead, to stocks with low or negligible FII interest?

The stock price performance of NSE-listed companies over the past three months provides no proof that this would have paid off. Given the broad-based nature of the recent meltdown, stocks with little or no FII holdings fared just as badly as those with notable FII interest.

Stocks with the highest FII holdings, in fact, contained declines better in a falling market. However, stocks with no FII and high MF holdings also held their ground in the meltdown.

Business Line sifted through the stock price performance of about 2,200 companies in recent months and compared it to their June quarter shareholdings to see how stocks with high FII holdings did. Here are a few interesting takeaways.

Though specific stocks in which Lehman did hold a stake, such as KPIT Cummins (fell 17 per cent), Development Credit Bank (fell 14 per cent) and Godawari Power (fell 19 per cent), were pummelled in the recent fall, investors can take heart from the fact that stocks with a high

FII holding, as a class, fared better than those with a low holding. Stocks that have more than a 50 per cent FII holding, on an average, returned a positive 3 per cent from the July 16 low.

For that matter, stocks such as HDFC and ICSA India put up a solid 34 per cent and 11 per cent gain respectively, despite high FII interest. And among the ones that did fall, stocks such as IVRCL Infrastructure and Geodesic Information Systems managed to contain losses to single digits.

The only stock that took a big hit was Prajay Engineers, which despite a formidable 70 per cent FII holding, fell by over 18 per cent. Stocks with FII holdings of 40-50 per cent declined by 4.5 per cent, and stocks in which FIIs were absent returned a positive 4 per cent.

But did stocks held by domestic institutions such as mutual funds do well? While Shivam Autotech (gained 34 per cent), Kirloskar Pneumatic (gained 33 per cent) and Dwarikesh Sugar (gained 28 per cent), which have MF but no FII holdings, moved up significantly, others such as Siyaram Silk, NILE and ITD Cementation slipped into the red.

That said, as a class, these stocks did contain their downside well, suggesting that mutual funds may have been less fickle-minded than some of the FIIs in this period. This becomes clearer when we look at the performance of stocks that have a high FII and no MF holding. For one, in this set, the number of stocks that lost far outnumbered the ones that recorded a double-digit gain.

Second, the losses in this set figured more in the ‘above-10 per cent’ category compared to stocks that were only MF held. Stocks such as SEL Manufacturing, JK Paper and Zodiac Clothing, which have only FII holdings, lost 16-65 per cent. But there also have been few star performers in this category — Dishman Pharma (gained 24 per cent), KS Oils (gained 15 per cent) and Igarashi Motors (gained 12 per cent), to name a few.

One lesson investors can learn from the recent rout is that a contrarian philosophy does work in troubled times. Under-owned sectors such as oil marketing companies, sugar and fertilisers have, in the recent months, notched up decent gains and, in the process, drawn greater interest from the FIIs and MFs.

Also, amidst the pandemonium, stocks that had no ‘big investor’ interest have revelled. Stocks with little or no holding by FIIs and MFs (on a combined basis) appear to have held their ground in the meltdown since July.

On an average, they have returned 6.4 per cent, which is at a significant premium to the average performance of stocks that have a reasonable foreign institutional and mutual fund interest.

In fact, a few have managed hefty returns of 30 per cent or more. Among the leading money spinners in this category have been stocks such as Jaipan Industries (419 per cent), KLG Capital (214 per cent), Melstar Infotech (47 per cent) and Dolphin Offshore (39 per cent).

It may not, however, be advisable to make an indiscriminate switch into stocks in this category. A chunk of these stocks are small-cap and appear to have a high ‘operator’ interest, which can wane as quickly as it builds up. Most of the companies in this set do not offer a strong fundamental picture, which also explains the absence of big investors.

So, while these stocks may have offered a temporary relief from the incessant beating that others with institutional holdings have taken, it may be best to take profits in them while the going is good.

Also, not all stocks with nil FII and MF holdings fared well. Had you invested in Sahara Housing (fell 30 per cent), Lloyds Metal (fell 25 per cent) or Refex Refrigerants (fell 18 per cent), you would have lost quite a bit of money by now.

Overall, sector- and stock-specific factors, rather than FII holdings, have played a key role in how stocks held up in the choppy market since July. While FII-held stocks such as HDFC, McLeod Russel, Phoenix Mills and ICSA India registered double-digit gains, others such as Prajay Engineers, Sesa Goa, Info Edge and NIIT lost heavily.

In all, it was the banks (Axis Bank, ICICI Bank, Kotak Mahindra Bank and HDFC Bank) and financial stocks (LIC Housing Finance, Reliance Capital and Max India) that clearly topped the returns chart. On the other hand, real estate, cement and other construction-related stocks found themselves drubbed (DS Kulkarni, India Bulls Real Estate, Ganesh Housing, HDIL and Arihant Foundation, to name a few).

Trends were also not uniform within a sector. Some of the stocks that gained despite their peer stocks taking a beating were Punj Lloyd, Educomp Solutions and Akruti City. Similarly, EMCO, Ranbaxy and Sical Logistics were in the red despite their peer companies recording gains. Clearly, market participants appeared to have picked stocks and sectors based on their fundamentals and not by the weight of their FII holdings.

So, if you are a long-term investor, it is advisable to hold on to quality stocks, even if they get decimated in this market. Remember, some FIIs sold stocks, not because the companies in question have a bleak future but because they themselves are having trouble with liquidity.

Stocks such as Tata Power and Jaiprakash Associates, sold by some prominent global investors last week, are a case in point. These stocks hold significant upside potential over the long term and the mere dumping of these shares by a few big investors isn’t reason to sell them, especially at beaten down prices.

Another point worth mentioning is that some of the stocks that recently cropped up in the ‘sell’ lists, going by the bulk deals data, were only a transfer of shares by the P-note client. For instance, the sale of Mastek shares by Lehman Brothers or Carborundum Universal by Merrill Lynch was just a transfer of shares from these FIIs to Nalanda India Fund, another FII.

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