Where the FIIs placed their bets in 2010

With domestic investors staying put on the sidelines, it is the foreign institutional investors (FIIs) who now hold sway on which stocks and sectors will deliver market-beating returns. Here is a look at the recent shifts in FII fancies.

An analysis of the quarterly change in FII stakes in listed companies threw up two trends. One, FIIs may be taking a breather from consumer stocks that have so far led the market rally and a fresh look at dark horses such as cement and telecom that have underperformed. Two, having stayed mainly with large- and mid-cap stocks in the early part of the year, FIIs may now be exploring smaller companies.

To arrive at the sectors the FIIs fancied, we considered the sequential change in total FII holdings, for the quarters from March to December 2010. Shareholding patterns of the constituents of the BSE Sensex, Midcap and Smallcap indices and the broader BSE-500, as well as sector indices such as the BSE Bankex and the BSE Realty were considered for the analysis.

Upping their stakes

Of the myriad entities that constitute a company's shareholders, the FIIs' and domestic institutional investors' holdings showed the most fluctuation.

Data on shareholding patterns show that FIIs increased their stake in BSE-listed companies from 9.6 per cent to 11.3 per cent of the outstanding equity from the start of 2010 to its end. This stake increase is spread across sectors, and market capitalisation. Here's detailing where FIIs put their money.

Returning interest

Going by sector indices, capital goods, metals, telecom and media are sectors to which FIIs returned in recent quarters, after shunning them earlier.

The BSE Capital Goods index saw FII holding in the March and June 2010 quarters drop to 12 per cent and 11 per cent, from 13 per cent early in the year. Holdings increased gradually back to 12 per cent over the next two quarters.

More than half the stocks in both sectors, even outside these indices, saw FIIs increasing stakes. For instance, FII holdings in Graphite India increased from 6.7 per cent at the end of March 2010 to 14 per cent by the end of December.

Similarly, FII stake in technology stocks represented by the BSE TECk index dipped to 10 per cent in the June quarter from 11 per cent previously, and rebounded to 12 per cent. In Zee Entertainment, for instance, FIIs pared stakes in the June 2010 quarter with their holdings dropping to 27 per cent from 29 per cent the previous quarter. Zee ended the December quarter with an FII holding of a good 35 per cent.

Taking the BSE Metals index, FII holdings slipped a percentage point to 12 per cent in the June quarter, even as NMDC came out with its follow-on offer during the period. Seven of eleven stocks saw FIIs shed stake in the period. Following rising commodity prices, the September and December quarters saw FIIs return to these stocks, taking their total holding to 14 per cent. For example, FII stake in Welspun Corp. increased from 17 per cent to 20 per cent, between the June and December quarters.

Consumer theme lacking

Even as they picked up stocks from new sectors, FII interest in stocks from the consumer theme — the poster-boy of the Indian economy for much of 2009-10, waned in recent months.

One, there was barely any increase in FII stakes in stocks from the FMCG index, for the most part of 2010, maintaining these at 16 per cent. Dabur India and Marico were a few stocks where FIIs increased holding – by 3 percentage points between the March and December quarters. Similarly, only select consumer durable stocks such as Bajaj Electrical and Whirlpool India saw good stake increases of 2 percentage points over the quarters.

Two, the retail sector has been almost entirely shunned, with only Bata India seeing a significant increase in holding, going from a 10.6 per cent FII stake in March to 15 per cent in December 2010. Big retail players such as Pantaloon Retail and Trent recorded steady declines in holdings over the past two quarters.

Three, in smaller or indirect consumer plays such as hotels and paints, FIIs have not showed any consistency. In paints and hotels, for example, FIIs reduced stakes towards the end of the year, while increasing holdings in alcohol stocks.

Dark horses

In what could be contrarian calls, the cement sector saw rising FII participation even as overcapacities and lower prices cloud near-term prospects. The September and December quarters have seen FIIs adding to their holdings in most cement companies. ACC, for example, ended the December quarter with a 15.5 per cent FII stake from the 12.7 per cent at end-June 2010.

UltraTech went from a 10 per cent FII holding in September to 12 per cent in the December quarter.

Similarly, shipping and ship-building, again facing near-term constraints, saw FIIs increase stakes in a good many stocks. For instance, FII holding in GE Shipping jumped 3.6 percentage points from March to December to land at 16.2 per cent. So much for sectors that held FII fancy.

Where did the FIIs pare stakes? Well, they did not entirely exit any sector, nor did they consistently reduce holdings in select sectors. What they did is to refrain from increasing stakes in banking, realty and auto stocks in the December 2010 quarter.

The BSE Bankex, for example, saw stakes increase from 22 per cent at the start of the year to 24 per cent in September, where it stayed put for the next quarter too. The BSE Realty index was worse off, beginning and ending 2010 at a 27 per cent FII holding, the same as the start of the year, even as holdings increased to 29 in the September quarter.

In the auto space, Ashok Leyland, Eicher Motors and TVS Motors saw marginal dips in FII holdings in the December quarter, while stakes in Tata Motors and Maruti Suzuki were flat. Similarly, Yes Bank, Axis Bank and Dena Bank saw slight declines in holding.

Capitalisation preferences

Sector plays aside, FIIs showed renewed interest in small-cap stocks in the December quarter after offloading them in the March quarter.

Considering all listed stocks for which December quarter shareholdings are available, FII holdings in small-cap stocks dipped to 4.6 per cent by the June quarter from the 5.2 per cent at the start of 2010. By the December quarter, holdings were back to 5.2 per cent.

However, in the total portfolio held by FIIs, large-cap stocks still accounted for 88 per cent, while small-caps made up only 3.5 per cent by December 2010. Going by valuations, FIIs appeared to have followed a value strategy of sorts.

Just about half the stocks that saw a significant increase in holdings (holdings increasing over 2 percentage points on a quarter-on-quarter basis) in the December quarter, were trading at a discount to the broader market (BSE-500) at the time.

The figure is a tad better for the September quarter, where roughly 60 per cent of selections were trading at valuations below that of the BSE-500.

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