Monday, January 26, 2009
Though FIIs are often painted as villains of stock market meltdown of the past year, an analysis of shareholding patterns for the BSE-500 companies (updated till December 2008) conveys quite a different picture. Even if they did trigger the broader market fall, the linkage between FII moves and stock price returns hasn’t been straightforward, for individual stocks. An analysis of price movements of the nearly 400 BSE-500 companies that have so far unveiled their shar eholdings proves this.
Also, retail investors may have stopped following FII cues when deciding what stocks to back, and promoters may have reduced their stakes while the going was good. For more trends from the shareholding patterns over 2008, read on:
Lighter holdings, lot of damage
After being net buyers for the past eight years (1999-2007), FIIs are now the third-largest shareholder group in Indian companies, after promoters and retail investors. Well, the Rs 53,000 crore of net selling done by them for 2008 hasn’t changed that picture much.
Average holdings of FIIs in the BSE-500 (data available for 415 companies) have fallen from 13.9 per cent to 12.3 per cent. Despite the FIIs lightening their holdings only marginally, the BSE-500 still fell by 59 per cent in value for the year. That can possibly be explained by the high impact costs of transacting in mid- and small-cap stocks. The numbers show that FIIs pared their stakes by 5 per cent or more in 56 companies or one in every seven. An analysis of stocks in which FIIs most dramatically cut their stakes suggests that liquidity, rather than fundamental considerations may have driven the sales in some cases. In companies such as Firstsource Solutions, IVRCL, Punj Lloyd, Nagarjuna Construction there was a huge sell-off by the FIIs.
Most of the selling was focused on the large-cap and mid-cap space, whereas they remained invested or hiked their stakes in several small-cap companies.
Retail investors break free
Though it is their sales that have drawn all the attention, shareholding data for the year shows that 2008 was not entirely about FIIs queuing up at the exit doors. A record number of new FIIs — 454 of them — registered in India in 2008 and the level of gross buys by FIIs remained relatively high through the year. So, which were the stocks bought by FIIs? Everonn Systems, Educomp Solutions, ICSA, Kirloskar Oil were some companies in which FIIs hiked their stake by a material 4 percentage points or more in 2008. For stocks such as BEML, the hike in FII holding can be attributed to the conversion of stakes held in P-note form to FII holdings.
However, while FIIs did continue to cherry-pick Indian stocks retail investors, this time round, didn’t necessarily follow their example. Kirloskar Oil, Redington, Everonn Systems, Country Club, in which FIIs increased exposure, saw retail investors cash out while Gujarat NRE Coke, Patni Computers, Arvind, Hotel Leela ventures, KFA, HCC, Subex, Jaiprakash Associates saw FIIs exit and retail investors pick up stakes.
Prices don’t track FII moves
Though FII sales were undoubtedly the trigger for the broader market meltdown, FII exits didn’t necessarily dictate how individual stocks performed. If the 50 stocks in which FIIs pared stakes the most in 2008 lost a stunning 68.4 per cent in value, the stocks FIIs fancied during the year didn’t fare any better.
The top 50 stocks in which FIIs hiked their stakes also incurred an average loss of 68 per cent in 2008! The stocks in which FIIs hiked their stake by more than 4 percentage points averaged an 81 per cent loss in 2008. The inference from these numbers is that stocks have lost value irrespective of FIIs buying. This is in contrast to the perception that FII entry drives stock prices up.
In fact, there are quite a few stocks that witnessed a high proportion of FII exits but still outperformed the broader index. Balrampur Chini, Shri Renuka Sugar, Syndicate Bank, BOC India and Spice Communication are some such companies (see Table1). Aggressive buying by domestic mutual funds and retail investors in some of the stocks heavily shed by FIIs helped their out-performance.
While Balrampur Chini or Shree Renuka Sugars have found takers on the back of an improving outlook for the sugar sector, despite the slowdown, BOC India and Spice Communication were driven by corporate actions (open offer and takeover respectively).
From the stock price performances, it appears that returns in the past year depended more on sector prospects than on FII action. Stocks in sectors such as realty, infrastructure, aviation and commodities were beaten down heavily on a deteriorating earnings picture.
Sectors such as FMCG, healthcare, oil marketing companies, and a few public sector banks out-performed irrespective of the FII action as they found takers among domestic investors and mutual funds given their defensive nature.
Hindustan Unilever, Hero Honda, Lupin, Godrej Consumer, Glaxosmithkline Pharma, Nestle India, Sun Pharma are the only companies in the sample that recorded positive returns.
Britannia, Dabur India, Apollo Hospitals, Spice Communication and GTL are some stocks in which FIIs sold heavily (4 percentage points); yet these companies outperformed those in which FIIs hiked stake.
Who did the buying?
Even as FIIs were selling, who was buying? Insurance companies, which hiked their overall holdings by 0.80 percentage points to 5 per cent, appear to top the list. With healthy premium collections for most of the year, insurance companies have been active investors in stocks in 2008. Retail investors saw their overall holdings go up by 0.60 percentage points to 11.3 per cent.
Mutual funds, which have historically taken the opposite position to the FIIs, increased stakes by 0.30 percentage points. Whenever FIIs sold shares, they bought them but the situation has changed slightly, with retail investors, who used to take lead from FIIs, also now taking an opposite stand. Though FIIs increased their holdings, retail investors stayed away from these counters. Promoters of Corporate India appear to have joined the FIIs in shedding their stakes. In the universe of stocks considered, the average promoter holding has come down by 1.30 percentage points to 57 per cent.
However, mergers, ADR/GDR issues, warrant conversion and FCCB conversions, apart from market sales, explained this trend. Apart from cases such as Ranbaxy Labs, which actually saw promoters sell out to an acquirer, takeovers and mergers reduced promoter stakes in the case of Kingfisher Airlines, Idea Cellular and HDFC Bank.
A few companies witnessed increases in promoter stake due to allotment of preferential shares, buyback of shares by the promoters or rights offers. Hindalco and Tata Motors are among companies in which promoters hiked their stake by subscribing to the rights offers.