“The institutional investor remains the bigger influence on individual trades simply because he has more money to support the order and that will have more of an impact on the stock.” The words of a noted Wall Street commentator underline the clout of institutional investors in the equity market. With an easy access to best minds and methods in investment research, institutional investors tend to be ahead of the curve when it comes to identifying the next multi-bagger.
Further, these investors, in most cases, hold on to their positions for a longer term. This makes it a worthwhile exercise to check which stocks institutions are buying into and the stocks which are not in their radar. While retail investors need to exercise caution and do their homework before taking an investment decision, a look at institutional activity can help considerably in providing the basic investment idea.
Institutional investors broadly encompass mutual funds, insurance and pension providers. Institutional interest in Indian equities has been rising over the years. In the eight months ended August 2010, they invested a net Rs 59,724 crore according to market regulator Securities and Exchange Board of India (Sebi) data. This is 48% more than the figure in the corresponding period last year. Typically, they have a strong focus on research and a medium-to-long investment horizon. This indicates that the stocks they invest in have reasonably strong growth prospects over the medium term.
A retail investor may not be familiar with sophisticated investment techniques, such as discounted cash flows (DCF) from a company’s future operations. Hence, tracking investment patterns of institutions may be a simpler alternative to long-term investing. “Mirroring institutional investment patterns could be one of the strategies employed by an individual investor. However, one need not blindly follow this strategy,” says Dhirendra Kumar, CEO of Value Research Online, a firm that tracks mutual funds and equities.
Investor Returns
Our analysis of the BSE 100 index has brought into focus 18 stocks, in diverse sectors such as automobiles, infrastructure, banks and IT where both FIIs and domestic institutions have simultaneously raised their stakes during period September 2009 quarter to the first quarter of FY10. A recent report by a brokerage house on mutual fund activity, also listed out several stocks which are currently the most popular picks of mutual fund equity managers and which also match our list in several cases. These include stocks such as Tata Motors, Reliance Industries and SBI amongst others.
The analysis indicates that 12 stocks in our study provided a positive return though it needs to be noted that the returns from mirroring the investment patterns of institutions are not guaranteed. Among these stocks, there were several picks from diverse sectors that easily outperformed the mere 6.4% rise in the broader Sensex, from the end of the September 2009. However, investors need to make their own independent decisions, as there is no guarantee of generating similar returns on these stocks in the future.
Further, these investors, in most cases, hold on to their positions for a longer term. This makes it a worthwhile exercise to check which stocks institutions are buying into and the stocks which are not in their radar. While retail investors need to exercise caution and do their homework before taking an investment decision, a look at institutional activity can help considerably in providing the basic investment idea.
Institutional investors broadly encompass mutual funds, insurance and pension providers. Institutional interest in Indian equities has been rising over the years. In the eight months ended August 2010, they invested a net Rs 59,724 crore according to market regulator Securities and Exchange Board of India (Sebi) data. This is 48% more than the figure in the corresponding period last year. Typically, they have a strong focus on research and a medium-to-long investment horizon. This indicates that the stocks they invest in have reasonably strong growth prospects over the medium term.
A retail investor may not be familiar with sophisticated investment techniques, such as discounted cash flows (DCF) from a company’s future operations. Hence, tracking investment patterns of institutions may be a simpler alternative to long-term investing. “Mirroring institutional investment patterns could be one of the strategies employed by an individual investor. However, one need not blindly follow this strategy,” says Dhirendra Kumar, CEO of Value Research Online, a firm that tracks mutual funds and equities.
Investor Returns
Our analysis of the BSE 100 index has brought into focus 18 stocks, in diverse sectors such as automobiles, infrastructure, banks and IT where both FIIs and domestic institutions have simultaneously raised their stakes during period September 2009 quarter to the first quarter of FY10. A recent report by a brokerage house on mutual fund activity, also listed out several stocks which are currently the most popular picks of mutual fund equity managers and which also match our list in several cases. These include stocks such as Tata Motors, Reliance Industries and SBI amongst others.
The analysis indicates that 12 stocks in our study provided a positive return though it needs to be noted that the returns from mirroring the investment patterns of institutions are not guaranteed. Among these stocks, there were several picks from diverse sectors that easily outperformed the mere 6.4% rise in the broader Sensex, from the end of the September 2009. However, investors need to make their own independent decisions, as there is no guarantee of generating similar returns on these stocks in the future.
Menu for investors
The analysis brought into focus several stocks in diverse sectors that could be considered for investment on a long-term basis. Take for instance, Tata Motors. FIIs have been bullish on this stock, given the turnaround in the operation of its key overseas brands, Jaguar and Land Rover (JLR). This company on a consolidated basis posted a net profit (excluding extra-ordinary items) of Rs 1,495.1 crore for the year ended March 31, 2010, against a net loss of Rs 2,808.4 crore a year earlier. This was due to a pick up in global demand for its marquee brands such as Jaguar and Land Rover. In addition, the cost-cutting measures implemented by the company also helped. This strong growth momentum has continued even in the first quarter of the current financial year, with the company reporting
a consolidated net profit (excluding extra-ordinary items) of Rs 2,012.3 crore, against a net loss in the previous year. This stock trades with a P/E of 11.8 times on a consolidated basis and trailing four-quarter basis, and appears reasonably valued.
Similarly, State Bank of India, the country’s largest bank, has seen a turnaround in its performance in the June 2010 quarter. The bank was growing at a high rate till FY09, when it posted a 36% year-on-year growth in profit at Rs 9,121 crore. Its growth trajectory, however, came to a halt in FY10, as its net profit remained flat. In fact, its loan book growth dipped to a mere 8% in the March 2010 quarter.
Analysts were worried whether the bank would be able to match the industry’s growth. The bank’s performance in the June 2010 quarter has put those concerns to rest. With a 21% growth in loan book and a 25% growth in net profit at Rs 2,914 crore, the bank is back to its earlier growth track. This stock is currently trading at a P/E of 18 times (on a standalone basis), well short of its P/E of 25, at the peak of the last boom in January 2008. The UPA government’s emphasis on expanding infrastructure facilities across the country has once again highlighted the potential of stocks in this sector. A case in point is Adani Enterprises-controlled Mundra Port and Special Economic Zone (MPSEZ), which is a leading private sector player in its sector. It has benefited from a shift in port traffic to Gujarat, given a shorter distance between the company and user industries in the North.
The financial performance of MPSEZ over the past few years has been significantly better than its peers operating in Gujarat, like Gujarat Pipavav Port, as the company’s operational income grew at a CAGR of 36.6 % to Rs 1,495.5 crore during the period March 2007 to March 2010. Also, MPSEZ’s net profit grew at a CAGR of 53.4% during this period.
The analysis brought into focus several stocks in diverse sectors that could be considered for investment on a long-term basis. Take for instance, Tata Motors. FIIs have been bullish on this stock, given the turnaround in the operation of its key overseas brands, Jaguar and Land Rover (JLR). This company on a consolidated basis posted a net profit (excluding extra-ordinary items) of Rs 1,495.1 crore for the year ended March 31, 2010, against a net loss of Rs 2,808.4 crore a year earlier. This was due to a pick up in global demand for its marquee brands such as Jaguar and Land Rover. In addition, the cost-cutting measures implemented by the company also helped. This strong growth momentum has continued even in the first quarter of the current financial year, with the company reporting
a consolidated net profit (excluding extra-ordinary items) of Rs 2,012.3 crore, against a net loss in the previous year. This stock trades with a P/E of 11.8 times on a consolidated basis and trailing four-quarter basis, and appears reasonably valued.
Similarly, State Bank of India, the country’s largest bank, has seen a turnaround in its performance in the June 2010 quarter. The bank was growing at a high rate till FY09, when it posted a 36% year-on-year growth in profit at Rs 9,121 crore. Its growth trajectory, however, came to a halt in FY10, as its net profit remained flat. In fact, its loan book growth dipped to a mere 8% in the March 2010 quarter.
Analysts were worried whether the bank would be able to match the industry’s growth. The bank’s performance in the June 2010 quarter has put those concerns to rest. With a 21% growth in loan book and a 25% growth in net profit at Rs 2,914 crore, the bank is back to its earlier growth track. This stock is currently trading at a P/E of 18 times (on a standalone basis), well short of its P/E of 25, at the peak of the last boom in January 2008. The UPA government’s emphasis on expanding infrastructure facilities across the country has once again highlighted the potential of stocks in this sector. A case in point is Adani Enterprises-controlled Mundra Port and Special Economic Zone (MPSEZ), which is a leading private sector player in its sector. It has benefited from a shift in port traffic to Gujarat, given a shorter distance between the company and user industries in the North.
The financial performance of MPSEZ over the past few years has been significantly better than its peers operating in Gujarat, like Gujarat Pipavav Port, as the company’s operational income grew at a CAGR of 36.6 % to Rs 1,495.5 crore during the period March 2007 to March 2010. Also, MPSEZ’s net profit grew at a CAGR of 53.4% during this period.
No doubt, Mundra Port trades at more than 40 times on a trailing fourquarter basis, but given the strong growth expected over the next few years, investors could consider this stock. Similarly, Adani Enterprises, which is aggressively ramping up its presence in power generation, and its recent decision to buy a major stake in Indonesian coal mines, should help it drive its sales and net profits significantly over the next 2-3 years. And while this stock trades at a consolidated P/E of 33 times, considering its growth prospects, it could be a reasonable buy for the long term.
Of course, there are well-tracked stocks in our list, like Reliance Industries, which currently trades at a P/E of 17.3 times on a trailing basis, and is quite an expensive stock. This stock has also underperformed the market over the past three months over concerns of fall in gross refining margins (GRMs) industry-wide. The company had earlier aggressively grown its net sales by 86.7% in the first quarter of FY10, considerably quicker than the pace of FY10, helped by the ramp-up in operations of the erstwhile Reliance Petroleum.
However, net profit growth of 32% in the current financial year, lagged the growth in its sales in the quarter under review. However, considering RIL’s widening footprint in the global oil sector through recent acquisition of shale gas fields in North America, it could be a value buy for a long-term investor.
And with the exploration sector in the country witnessing rapid expansion, it also makes stocks like Welspun Corp attractive, which supplies submerged arc welded pipes to the oil sector. This stock is attractively valued at 8.5 times on a trailing basis.
Another stock worth mentioning is HCL Technologies, a top-tier IT services company in the country. The company has seen institutional buying in recent times following the robust growth in its volumes in the past two quarters. The company is expected to maintain the tempo given its plans to revamp its BPO operations and the benefits of its inorganic strategy (see stock idea on page 2). Thus an individual investor could consider some of the stocks that large, institutional investors are betting on and hope to earn descent returns over the long term.
How we did it
We selected the companies in the BSE 100 index for the analysis since it covers nearly two thirds of daily trading volumes on the Street and over 90% of BSE's total marketcapitalisation. We pulled out the shareholding pattern of stocks from the index. As there are several stocks in this index that are listed only over the past 12-15 months, we limited our analysis to the September 2009 quarter and the latest available quarter. We then identified stocks in which both FIIs and domestic institutional investors have both simultaneously increased their stake during our period.
Of course, there are well-tracked stocks in our list, like Reliance Industries, which currently trades at a P/E of 17.3 times on a trailing basis, and is quite an expensive stock. This stock has also underperformed the market over the past three months over concerns of fall in gross refining margins (GRMs) industry-wide. The company had earlier aggressively grown its net sales by 86.7% in the first quarter of FY10, considerably quicker than the pace of FY10, helped by the ramp-up in operations of the erstwhile Reliance Petroleum.
However, net profit growth of 32% in the current financial year, lagged the growth in its sales in the quarter under review. However, considering RIL’s widening footprint in the global oil sector through recent acquisition of shale gas fields in North America, it could be a value buy for a long-term investor.
And with the exploration sector in the country witnessing rapid expansion, it also makes stocks like Welspun Corp attractive, which supplies submerged arc welded pipes to the oil sector. This stock is attractively valued at 8.5 times on a trailing basis.
Another stock worth mentioning is HCL Technologies, a top-tier IT services company in the country. The company has seen institutional buying in recent times following the robust growth in its volumes in the past two quarters. The company is expected to maintain the tempo given its plans to revamp its BPO operations and the benefits of its inorganic strategy (see stock idea on page 2). Thus an individual investor could consider some of the stocks that large, institutional investors are betting on and hope to earn descent returns over the long term.
How we did it
We selected the companies in the BSE 100 index for the analysis since it covers nearly two thirds of daily trading volumes on the Street and over 90% of BSE's total marketcapitalisation. We pulled out the shareholding pattern of stocks from the index. As there are several stocks in this index that are listed only over the past 12-15 months, we limited our analysis to the September 2009 quarter and the latest available quarter. We then identified stocks in which both FIIs and domestic institutional investors have both simultaneously increased their stake during our period.
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