FIIs reduce holding in one-third of BSE 500 stocks

BL Research Bureau Foreign institutional investors (FIIs) may have continued to pour money into the Indian markets in recent months, but they weren’t uniformly bullish on all stocks or sectors.

FIIs have actually trimmed their stakes in half of the BSE Sensex companies in the quarter from June to September 2009.

Big names as Bharti Airtel, ONGC, BHEL and ICICI Bank saw a dip in FII ownership over the past quarter. Over 180 companies in the BSE 500 basket also saw a fall in their FII holdings in this period.

Media shed

Shareholding patterns, in fact, show that it was a limited set of stocks that benefited from FII buying in recent months, as they continued to cash out where stock prices had run-up.

FIIs reduced holdings in many index and mid-cap stocks, even as they subscribed enthusiastically to qualified institutional placements.

Media and entertainment was one sector that FIIs singled out for significant selling, trimming their stakes by between 3.5 and 9 percentage points in stocks such as Television Eighteen, NDTV, Wire & Wireless and Entertainment Network.

FIIs have, in fact, been pessimistic on media stocks from the June quarter itself, when stocks such as Balaji Telefilms, Zee News and Reliance MediaWorks saw a drop in FII holdings.

No sector bias

Outside of cutting exposure to media stocks, FIIs did not display much of a sector bias in trimming their holdings and instead, took a stock-specific view for their buys and sells.

For instance, within the sugar sector, the stock of Balrampur Chini Mills saw FIIs trim their stakes by 5.7 percentage points, but Shree Renuka Sugars saw a 4.7 percentage point increase in FII holdings.

While FII holdings in Gammon India fell by 5 percentage points for the quarter, their holdings climbed steeply in stocks such as Maytas Infrastructure, Lanco Infratech and Nagarjuna Construction. They trimmed stakes in mid-sized software player Tanla Solutions, while adding in 3i Infotech.

The realty sector, which raised massive funds through the qualified institutional placement route, was the rare one to see an across-the-board increase in FII holdings. Companies such as Unitech, Hindustan Construction Company, HDIL, DLF and Sobha Developers all saw major increases in FII stakes.

Overall, the level of FII holding in the BSE 500 universe has risen negligibly in the September quarter; from 13.3 per cent in end-June to 13.9 per cent by end-September.

The preceding June quarter saw the FII holdings rise more sharply from 12.5 to 13.3 per cent.

Retail investors make Rs 1.9-lakh cr in market rally

Promoters walk away with Rs 13 lakh crore.

BL Research Bureau Stock price gains have generated crores of rupees in notional wealth for investors holding on to equities so far this year. However, only a small slice of this may have accrued to retail investors.

Stocks in the BSE 500 added over Rs 24-lakh crore in market capitalisation in 2009, mainly through price gains. Of this notional wealth, retail investors saw an accretion of Rs 1.9 lakh crore, while promoters of India Inc walked away with over Rs 13 lakh crore.

These numbers are based on the shareholding patterns of the BSE 500 companies, which account for nearly 94 per cent of the total market capitalisation on the exchanges.

Lion’s share for promoters

Across-the-board gains in stock prices have expanded the market value of the BSE 500 stocks from about Rs 29-lakh crore at the start of this year to about Rs 53-lakh crore now. It is the promoters, holding 56.7 per cent of the market cap of these companies, who raked in the lion’s share of this wealth. That’s probably one reason why the Forbes Rich List released last week showed a doubling of the number of Indian billionaires!

Next in the line of beneficiaries were Foreign Institutional Investors (FIIs) that saw the value of stocks held shoot up by Rs 3.6-lakh crore. Domestic institutions — mutual funds and insurance companies — saw a Rs 2.2-lakh crore addition to their assets from the rally. Individual investors can probably take heart from this, as it is retail savings that domestic institutions redirect into the stock markets.

The accretion to market capitalisation, or notional wealth mentioned above, is a function of both the increase in the number of shares held by investors and the price gains on their stocks, though the latter accounted for the bulk of the gains. Adjusting for changes in the shareholdings, the FIIs pipped all other classes of investors in generating stock price returns. The FIIs saw an 80 per cent stock price appreciation on their holdings between January 1 and now, while retail investors saw a 75 per cent appreciation.

Retail investors cash in

The numbers show that company promoters continue to hold a sizeable, 56.7 per cent, stake in the market capitalisation of the BSE 500 companies (based on end-September 2009 data), even after selling into the rally this year. The FIIs own 13.9 per cent of the market cap, having hiked their stakes from 12.8 per cent at the start of 2009. Domestic institutions too have added to their holdings, and now own 9.1 per cent.

Retail investors, who now hold about 8 per cent of the outstanding market value, have marginally reduced their equity stakes since January. Consistent selling by retail investors over the past few months suggests that they may have used rising stock prices to convert a portion of their equity holdings into cash.

BRIC markets lead the surge

India stands at 10th place with 87% return in 2009.

The BRIC magic has worked this calendar year too with all four countries – Brazil, Russia, India and China – placed among the top 15 in the performance table.

Brazil’s Bovespa index has returned 142 per cent in dollar terms since the beginning of this year and is placed at the top of the returns table containing leading global benchmarks. Russia’s RTS Index comes third with 121 per cent return. India’s Sensex is placed at the tenth spot with 87 per cent gains and China’s Shanghai Composite Index is in the fourteenth place with 74 per cent.

China’s benchmark has slipped five places from the ninth position it was at, towards the end of last week following the sell-off in Chinese stocks this week after their banking regulator asked Chinese banks to improve their capital adequacy ratios.

It is not just the BRIC markets but the entire emerging market universe that has returned stellar gains this year. The indices yielding 3-digit returns and placed among the top ten gainers among global benchmark indices include Peru Lima Index, Jakarta Composite Index and Argentina’s Merval index.

Developed Market indices have yielded relatively lower returns with the Dow returning only 19 per cent this year and the UK’s FTSE and Germany’s DAX returning less that 40 per cent.

The gains in BRIC markets was driven by global funds moving in to these equities once the dollar began its steep decline since April this year. With the waning of fears of a prolonged global recession from the second quarter of 2009, risk appetite returned; leading money back to riskier asset classes such as emerging market equity.

The rapid economic growth envisaged in the BRIC economies in the years ahead has also been a strong factor in attracting funds. IMF, in its world economic outlook has noted that after contracting by about 1 per cent in 2009, global activity is forecast to expand by about 3 per cent in 2010.

The rebound is to be driven by China, India and a number of other emerging Asian countries. Organization for Economic Co-operation and Development (OECD) has echoed this sentiment in its semi-annual outlook, expecting China and India and Brazil to grow by 10-, 7- and 5 per cent in 2010. The report expects Russia’s turnaround to be even more dramatic.

Strength in the currencies of Brazil, India and Russia since March has also been an incentive for foreign funds, since their returns are enhanced by currency gains. Brazilian ‘Real’ has appreciated 26 per cent this year while the Indian Rupee is up 4 per cent.

The out-performance of emerging markets and the BRIC quartet in 2009 is also due to the fact that their equity markets had a relatively benign first quarter. Most of the emerging market benchmarks including India did not re-test their October 2008 lows, while the Dow dived 26 per cent in the first three months before turning around.

Unitech: High-risk, high-return deposit

Vidya Bala

The fixed deposit scheme of Unitech is suitable for investors who can stomach some risk. The sharp downturn witnessed in the real estate sector, fund crisis faced by many players in the sector and the slow pick-up in demand for real estate place the business of Unitech in the high-risk category. Unitech's large size, established brand name and improved financials have, however, been steadily aiding recovery.

The attractive interest rates of as much as 12 per cent per annum for a three-year period can be construed as a premium payout for the risk involved.

Investment strategies

Investors can adopt a two-pronged strategy to reduce their risk term/exposure.

Short tenure: One, investors can restrict the term of their fixed deposit to six months to one year, locking their money for a short period and yet enjoying an interest rate of 11 per cent – a return not presently available in bank fixed deposits and most credit worthy financial institutions.

A six-month deposit is, however, available only under the cumulative option (where interest is paid on maturity) and would entail a minimum investment of Rs 25,000.

Interest payout: Investors can consider the two-year interest payout option (called Scheme A), available on a quarterly basis, at 11.5 per cent per annum. This would allow cash out on the interest, even as the principal continues to earn returns.

Net of tax, assuming a 10 per cent tax slab, you would earn an interest of 10.3 per cent if you opt for a two-year term under Scheme A.

A payout option, would however, require you to invest a minimum sum of Rs 25,000. Banks currently offer a maximum of 7.5 per cent for up to 2 years.

Cumulative option

While the above two investment strategies would be our preferred mode of investments, individuals who can assume higher risk can consider taking the two-year cumulative option where interest would be compounded and paid out only on maturity. Without doubt, the cumulative option is certain to offer superior yields as you earn “interest on interest”. Besides, the company has made the cumulative scheme attractive by compounding interest on a monthly basis.

For instance, if you consider the two-year cumulative scheme, Rs 10,000 would grow to Rs 12,572 at the end of two years, at an interest rate of 11.5 per cent. This would work to a yield of 12 per cent over the term. However, net of tax (assumed at 10 per cent), the yield would be about 11 per cent.

Investors can refrain from the three-year term as bank interest rates may themselves see a revival. The latter would then provide a safer and attractive option.

The company

Unitech is among the few real estate developers with a pan-India presence. The company's present projects measure to 21.5 million sq.ft. across nine cities, that include large projects in Gurgaon, Noida, Mumbai, Chennai and Kolkata. After being hit by the 2008 real estate crash, Unitech was also faced with a situation of mounting debt by late 2008. While it took resorted to a debt restructuring programme initially, the company thereafter offered residential projects at discounts to market prices and launched a number of affordable homes in order to revive working capital flows. Simultaneously in 2009, it successfully raised about Rs 4500 crore of equity in two tranches through qualified institutional placements.

These measures have enabled the company to bring back its net debt to equity ratio to a healthy 0.6 times in September, from a worrying 1.8 times in March. A good portion of the QIP funds have been used to repay debt, with the rest being ploughed for construction work.

The company has sold 50 per cent of the total area launched, a good part being residential projects. It has raised about Rs 550 crore through these sales so far; the rest of the payments, being mostly linked to construction, would only flow in a staggered manner. The company's interest obligations appear adequately covered by profits, despite decline in earnings over the past year and a half.

Additional interest: The fixed deposit scheme offers an additional 0.5 per cent per annum for its employees, shareholders (minimum holding of 100 shares), property owners as well as senior citizens above 60 years.

A small-cap strategy

An investor with a wide exposure to small caps can beat the Nifty.

Astronomers say life exists on earth because of the Goldilocks Principle. The planet is neither too hot nor too cold; it's just the right temperature like the porridge Goldilocks ate. The investor's equivalent would be the stock, which is receiving just the right amount of attention.

While being a gross over-simplification, it is true that over-hyped stocks also tend to be inflated in price. Completely ignored stocks can continue to be ignored, and under-priced. Of course, there is subjectivity involved in judging the ‘right amount’ of attention. Are we talking substantial institutional coverage and occasional headlines? Are we talking ‘passing mentions’ in business channels or single column items in pink papers?

Any of these may qualify because investment is a subjective exercise. Some prefer to enter a stock early before it has institutional support. Others enter only when there is solid institutional coverage. Still others only enter when it's a big company and making headlines.

Quite often, the attention is a function of size. Big companies are rarely completely off the radar because media and institutional investors track them with dedication. Quarterly statements are dissected and usually, there is guidance and forward projections. Changes in management, in marketing strategy and ad budgets are also noted and debated.

Midcaps also make the news with regularity. At the least, analysts collate quarterly results and do the slicing and dicing. Small caps very rarely make the news unless something unusual happens. Some small caps never make the news beyond statutory coverage at the time of IPOs.

The low risk investor focusses on the highly-covered large caps. These are generally the least volatile segment due to the widely-disseminated information. Of course, stocks as a class are always volatile assets but there are two further safety factors available for large caps.

One is that they contain large institutional holdings and that puts a floor on price. The second safety factor is that they are liquid; there is always a chance of cutting losses. The medium risk investor focusses on mid-caps. Here too, there is usually institutional coverage. Volatility tends to be more than with large caps. But there is usually enough reserve liquidity to cut losses and enough institutional holding to put floors on prices.

Only big risk-takers touch small caps because these tend to extra volatility and carry extra risks. There is usually no institutional holding and hence, no floor. There is also a great deal of opacity and absence of information in terms of governance, marketing strategy (if any), etc.

However, given the lack of information, any coverage of a small-cap is worth noting. It usually denotes either an exceptionally favourable event or an exceptionally unfavourable one. There is a high “signal to noise” ratio because there is little noise.

Between May 2004, when the first UPA government took charge, and January 2008, there was a bull run. The Nifty, which is of course, large-caps, generated returns of around 392 per cent from trough to peak. The NSE Midcap Index registered returns of around 440 per cent and the BSE Small Caps returned 704 per cent. Between January 2008 and October 2008, the Nifty lost 65 per cent while the Midcaps lost 73 per cent and the Smallcaps 77 percent.

If we assume passive holdings between May 2004-October 2008, the Nifty was up 77 per cent (CAGR 15.5%) while the Midcaps was up 46 per cent (CAGR 10%) and the Smallcaps was up 85 per cent (CAGR 16.5%). The movements can be viewed in the light of the theory that high risk needs to be associated with higher returns. The Nifty follower risked less than the small cap dabbler but on balance, gains less. The Midcaps investor was the worst off.

However, there is another practical point. The Nifty is easily tracked and hedged, via index funds and derivatives. The Midcaps comprises 234 companies, while the Small Caps comprises 474 companies and neither is covered by index funds. Both are impossible to track for small investors.

At best, we can say is that an investor with wide coverage of small caps would have a good shot at beating the Nifty. But the excessive volatility makes it possible that there would be a large negative (or positive) tracking error in benchmarking any small caps portfolio to the Smallcaps Index. This is where some judicious filtering on the basis of the Goldilocks Principle may help.

Global economy is still weak, says IMF

The head of the IMF, Mr Dominique Strauss-Kahn, said here on Monday that although the worst of the global financial storm had passed, the world economy remains "highly vulnerable."

"Today the storm has passed. The worst has been averted thanks to a bold and rapid policy response and thanks to cooperation," he told delegates at the annual conference of the Confederation of British Industry (CBI) — Britain’s biggest employers group.

"We can say that the recovery has started but everyone understands that it is very fragile and still dependent on policy support. The financial conditions have improved but are still far from normal."

Mr Strauss-Kahn, who is the managing director of the International Monetary Fund, added: "The economy ... (is) getting better, but (is) still highly vulnerable."

"During the crisis, everyone was united by a common purpose. Going forward, this might dissolve. So the road ahead will be less clear cut."

The governments have committed trillions of dollars in stimulus and guarantees and central banks have cut interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.

Mr Strauss-Kahn added that nations needed to cooperate more to build on signs of worldwide economic recovery.

"The global economy has made remarkable progress over the past year, but as we stand on the cusp of recovery, new and complex challenges are already popping up," he said.

"How do we deal with these challenges? In my view, there is really only one fundamental answer — to persevere with the spirit of cooperation that has brought us to this point."

He added: "The challenges... all require cooperation. We need cooperation on exit strategies. We need cooperation on the new growth model. We need cooperation on financial sector regulation."

The CBI is meanwhile focusing its latest annual London conference on how businesses can best recover from Britain’s longest rece-ssion on record. Britain is the last major world power still mired in recession, after the eurozone, France, Germany, Japan and the United States all emerged from a steep global economic downturn.

Query Corner: Fresh long-term uptrend in Indusind Bank

Please let me know the prospects of Voltamp and Alstom Projects. Sultan Mohideen

Voltamp Transformers (Rs 741.7): The recovery from the March low of Rs 265 in Voltamp is halting at the key intermediate-term resistance of Rs 900. The stock has been unable to penetrate this level over the last four months and has been moving in a narrow range just below it. The medium-term trend in this stock however continues to be up and if the stock holds above Rs 650, then it can move higher to Rs 1,100 or Rs 1,300 over the next twelve months.

Investors with a medium-term perspective can hold with a stop at Rs 650. Decline below Rs 650 will imply an impending move to Rs 510. Long-term investors can hold the stock as long as it trades above this level.

Alstom Projects India (Rs 521.3): In our review of this stock in July 2008, we had indicated that the long-term support was in the zone between Rs 200 and Rs 240. Alstom Projects rebounded many times from this zone between October 2008 and February 2009 before moving up to the recent peak of Rs 610. Immediate resistance for the stock is at Rs 650 that is half of the losses recorded in 2008. If this level is surpassed, the stock can rally to Rs 760.

Investors with a short-term horizon can hold with a stop at Rs 470 while long-term investors can hold with a deeper stop at Rs 345.

I am holding Indian Hotels purchased at Rs 86 and Deepak Fertilisers at Rs 64 for the last one year. Please tell me whether both the stocks will touch Rs 115 in next 3 months. Alok Varshney

Indian Hotels Company (Rs 83.9): Indian Hotels faces strong intermediate term resistance at Rs 86 that occurs at 38.2 per cent retracement of the 2008 fall.

The stock moved beyond this level in the second week of November but has not managed a strong close beyond this level yet. However the medium-term trend continues to be strong and the stock could attain the levels of Rs 104 or Rs 115 in the next three months. Investors with a medium-term perspective can hold the stock with a stop at Rs 78.

The stock has formed a long-term trough at Rs 34 in March and even if the stock launches in to an intermediate decline, it is likely to find support at Rs 56. Long-term investors should therefore hold this stock with a stop at Rs 55.

Deepak Fertilizers & Petrochemicals Corporation (Rs 90.3): Deepak Fertilizer is also in a strong medium-term up-trend and can attain your target of Rs 115 in the next three months. The stock has retraced half the slide from the December 2007 peak of Rs 167.

Key intermediate resistance for the stock is at Rs 110 and Rs 128 and the stock can form a peak between these two levels also. Stop-loss for investors can be at Rs 82. Breach of this level will pull the stock down to Rs 67.

I am planning to invest in Indusind Bank at current levels. What are the stock's prospects? J K Venkatesh Prasad

Indusind Bank (Rs 120.7): In our review of this stock in August, when the stock was poised at Rs 95, we had noted a positive bias in the medium-term outlook and a possible move towards Rs 105 or Rs 135 in this period.

The stock recorded the peak of Rs 145 on October 20 and has turned volatile since then as the previous all-time high was at Rs 136, recorded in December 2007 is in the vicinity. The spectacular move from March low of Rs 26 denotes that a fresh long-term up-trend is in motion in this stock.

However one-leg of this up-trend could have ended at Rs 145 and the stock appears to be in a medium-term correction that can result is a sideways movement between Rs 100 and Rs 150 for a few more months.

Investors wishing to buy this stock can do so in declines close to the Rs 100 mark with a stop at Rs 95. Subsequent supports are Rs 86 and Rs 72. Minimum target on a break-out above Rs 145 is Rs 174.

What are the prospects of Electrotherm India and Lloyd Electric and Engineering? TomlinTomichan

Electrotherm India (Rs 250): This stock is biding its time after the recent peak of Rs 306. The medium-term view on this stock will stay positive as long as it holds above Rs 218.

If this level is not breached, a rally to Rs 360 or Rs 430 can be expected over the ensuing 12 months. Investors can therefore hold the stock with a stop at Rs 200. Key medium-term support for the stock exists at Rs 160.

Lloyd Electric & Engineering (Rs 55): This stock is making a valiant effort to claw upwards from the July low of Rs 27. Key medium-term resistance for this stock is at Rs 62, where it is currently pausing.

Though the trend along both the short and medium-term time frames continue to be up, the stock could get in to a mild decline from here that pulls it down to Rs 45. Investors can hold the stock as long as this support holds.

Those wishing to buy the stock can do so on a firm weekly close above Rs 65. The medium-term target would then be Rs 96.

What are the technical prospects of Pidilite Industries for the next 12 months? Sanjeev Shahane

Pidilite Industries (Rs 196.2): The crash of 2008 made Pidilite Industries halt at the long-term support band between Rs 80 and Rs 90 and the stock has recouped almost all the losses since then. There will however be some difficulty in surpassing the long-term resistance zone between Rs 200 and Rs 220. Inability to surpass this level will result in the stock moving sideways between Rs 130 and Rs 200 for the next 12 months. Long-term investors can therefore hold with a stop at Rs 120 while those with a shorter investment horizon can divest some of their holding in the resistance band mentioned above.

Long-term target on a strong break above Rs 220 is Rs 300.

Kindly advise me on the short and long-term targets of Parsvanath Developers. Suresh Dabke

Parsvanath Developers (Rs 104.5): This stock continues in the throes of the bear's grip. The medium-term resistance at Rs 165 remains unconquered and as long as the stock remains below this level, it is expected to vacillate in a wide band between Rs 50 and Rs 150. In other words, the stock can move close to its March lows over the medium-term. Long-term outlook will turn positive only on a weekly close above Rs 165. Subsequent target is Rs 250.

The short-term trend in the stock is also down and a decline to Rs 91 or Rs 76 is possible in this period. Short-term investors can hold it with a stop at Rs 85.