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Foreign investors are shying away from Indian IT stocks for the second year in a row.
According to NSDL data, foreign portfolio investors (FPIs) pulled out a net sum of ₹21,238 crore from the Software and Services sector, making it the highest loser of foreign equity in FY20. The outflow is twice the ₹10,113 crore that FPIs pulled out in FY19.
“Cross-currency headwinds, muted outlook by managements, slowing BFSI spend due to a potentially weaker macro in developed markets...and regulatory hindrances by developed economies meant that software stocks seemed fairly valued in the background of slowing topline growth and expected squeeze on margins,” said Deepak Jasani, Head of Research, HDFC Securities.
Earlier this month, technology research and advisory firm Information Services Group (ISG) lowered its forecast for global deal activity this year on account of the pandemic. Bank of America Merrill Lynch said ISG’s statement implies a 10 per cent decline in global deal activity in 2020, with the fall being more pronounced in the end of the June quarter.
Liquidity crunch
FPI sell-off in the Food, Beverages & Tobacco sector was even sharper. The sector witnessed a net outflow of ₹14,055 crore in FY20, nearly eight times the ₹1,980 crore in FY19.
“The general slowdown in the FMCG and retail space in the given year can be attributed to the liquidity crunch faced by the entire economy post the IL&FS crisis,” said Nirali Shah, Senior Research Analyst, Samco Securities. “ITC alone witnessed a reduction of 2.1 per cent in FPI from the June quarter of 2019 to the March quarter of 2020.”
Surprisingly, the Pharmaceuticals & Biotechnology sector, which was among the top five gainers under the equity category in FY19, ended up losing a net of ₹11,200 crore in FY20. “The crippling structures being imposed by the USFDA put pressure on Indian pharmaceutical and biotechnology companies, which led to the extreme outflow from FPIs,” Shah said.
“However, things seem to be normalised in this sector and this year could be a turnaround with more inflows than outflows by foreign investors,” she added.
Outflow in March
As the number of Covid-19 cases spiked in India, FPI sell-off also witnessed a record monthly outflow in March. FPIs pulled out ₹61,973 crore from equities and ₹60,376 crore from debt that month. In the Financial sector, which includes banks and NBFCs, equities faced the wrath of this massive outflow, losing ₹20,000 crore, or 32 per cent of the total amount pulled out by the FPIs.
However, foreign investors continue to pour money into the Indian listed insurance space. The sector was a big gainer of FPI inflows, with a net receipt of ₹27,500 crore in FY20. The other gainers in the previous fiscal include Media (₹6,627 crore), retailing (₹3,605 crore), Oil & Gas (₹3,037 crore) and Coal (₹1,900 crore).
“Insurance is a comparatively newer category which came out with a number of IPOs only from 2017. Since then this space has gained momentum because of the evergreen streams of revenue and its under-penetrated nature along with high regulatory entry barriers,” Samco Securities’ Shah said.
“Investors are huddling to get a piece of this massive growth driver to India’s future,” she added.
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