FIIs: What Do They Want?

TCS touched a market capitalization of Rs 4 L Cr. on the exchange today when its share price hit Rs 2043.71/share. It’s the 2nd Indian company to achieve such a feat! The next big company, Reliance Industries, has a market cap of Rs 2.75 L Cr, followed by ITC (Rs 2.43 L Cr) and ONGC (Rs 2.13 L Cr). TCS has appreciated by 62% in 2013 and about 35% in the past 3 months only. Reasons are many-fold:




1. Falling Rupee
2. Superior performance over peers, specially Infosys
3. Healthy profit margins
4. Increased brand recognition in US/Europe
5. Recent recovery in US
6. Lack of opportunities in Indian stocks
7. Minimal government intervention


Some of the factors are valid for other stocks too, like HCL Tech which has appreciated by around 39% in the past 3 months.
Hexaware has surged the most (55%) but most of it has been because of the stake buyout in the company valuing the shares at Rs 128/share.
Wipro (42%) and Tech Mahindra (40%) gained mostly as both of them are being seen as a turnaround story. Wipro is slowly getting its house in place while Tech Mahindra, after merger with Satyam, is growing from strengths to strengths.
Return of Mr. Narayanamurthy and splendid results by Infosys seen it add 32% to its market cap in the last 3 months.
Mindtree (28.5%) was another success story in the past 3 months at the back of improving performance.


However, the out-performance of IT stocks at the backdrop of horrible conditions in India also suggest some other trends too.
1. FIIs are booking out their profits in highly owned stocks like HDFC (73.64%), Yes Bank (46.03%), Federal bank (44.34%), Jubilant Foodworks (44.02%), Axis Bank (40.7%) etc. and moving it to the likes of TCS, HCL Tech, Wipro and Tech Mahindra
   In fact, HDFC fell by around 25% in the past 2 months. Yes Bank saw a cut of 48% at the back of RBI measures which spooked the FIIs. For Jubilant Foodworks, which runs the Dominos Pizza chain in India, the fall has just begun with the stock falling over 11% in the past 1 month. However, it has corrected more than 30% since March 15,2013. And Axis Bank has fallen by 45% in the last 100 days!


Bank Nifty has seen the sharpest knock as it constituted around 27% of the stock indices. FII ownership of this sector has been historically high. Over the last few months, this has gone down to 21% while IT has gained most of it.
Going forward, this trend is likely to continue with continued selling pressure on private sector banks. Incidentally, Public Sector Banks have out-performed private sector banks in the last one month.





Top 10 companies with highest FII ownership as per June 30, 2013 (Moneycontrol.com)


2. Going ahead, the same trend can be seen in Pharma stocks too which also have high FII ownership. Although, the cuts may not be as sharp as the banking stocks as some of the factors driving the IT stocks are valid for pharma stocks too. However, the kind of cuts seen in Lupin and Sun Pharma shows that somewhere, FIIs feel that profits can be booked on these stocks too.
3. A look at the share holding pattern of outperforming IT stocks points to some direction-

Companies	FII Holding	Gen.Public	Promoters	NPM%	ROE	Returns(3m)
HEXAWARE	36.21	12.24	27.92	29.8	29	55.52
WIPRO	7.29	5.55	73.54	16.35	23.31	42.39
TECH MAHINDRA	26.79	6.73	47.17	8.75	13.37	40
HCL TECH	24.45	2.59	61.92	21.18	29.53	39.13
TCS	15.67	4.06	73.96	25.24	39.32	35.15
INFOSYS	39.55	11.31	16.04	23.38	25.28	31.9
MINDTREE	30.99	12.41	16.8	14.13	25.79	28.49



All these companies have low ownership by the general public. The ownership of one of the largest recruiters of Indian Engineers is only 4.06%! HCL Tech, Wipro, Tech Mahindra - all have an ownership of less than 10% by the general public. High Promoters' stake in these companies make the floating shares a prized possession.  The above data suggests that Wipro is well poised to appreciate further at the back of shareholding pattern argument.


A regression between public ownership and 3-months returns (for 22 firms) shows an R-square value of 43.87% showing reasonable correlation between the two parameters.


But a supply constraint is worth exploiting only if the underlying has superior returns.


Almost all the outperforming IT stocks have shown high Net Profit Margins (NPM%) and high Return On Equity (ROE), except for Tech Mahindra as it has only recently emerged out of its zillions law-suits inherited from Satyam Computers. Analysts are most bullish on this stock as the valuations are still quite cheap and has superb management backed by the Mahindras.


However, regression analysis between NPM% and Returns, and ROE and Returns gave a lower R-square of 21.58% and 23.91% respectively.


Thus, Investors may look to add Wipro, Tech Mahindra, HCL Tech and TCS (in the same order) in their portfolio at any dip.


Under-performing IT stocks like Zensar, Sasken, Geometric, Sonata etc. have an average public shareholding of around 30%. Their being mid-cap can also be a factor.


FIIs bought Rs 70,692.6 Cr worth shares in August while sold Rs 78,163.07 Cr. Thus, remaining  net sellers for consecutive 3 months. With Q1 GDP falling to 4.4% (last seen in 2003!), the trend may continue. They may keep adding positions to IT sector till the rupee advantage sustains for the industry and micro-economic situations in the country do not improve.









Well, horrible GDP data and continued tensions over Syria have made sure that the beginning of September would be 'Blood Red' on the indices.
Happy Shorting!

Hedge Yourself! Rupee heading for 65!!!

Markets, today, fell most in the last 4 years. Sensex tanked 769.41 points to close at 18598.18 while Nifty closed shop at 5507.85 levels, down 234.45 points (4.08%). Only 3 scrips in the 50-stock Nifty basket ended in green while the top losers on Nifty lost from 8-11%.

 Rupee touched an all time intra-day low of Rs 62 before closing at 61.55 per dollar, again a record on closing basis. The reasons for today's massive fall are many fold including the one making the loudest buzz of Indian govt resorting to Capital Controls to stop the rupee rot. Statements by both RBI and GOI are trying to assure the foreign investors that nothing of such sort is being done. And I think they should not even think of trying any such gimmick in a country where you don't have control on most of the things. At one time, we were having pretty strong portfolio (of black money) at Swiss Bank!

With the arrival of September, Investors would get more jittery at each and everything that US Fed says (or doesn't say) about the QE program. They are likely to tone down the easy money that they have been providing to the market. That's a problem for our country primarily on two accounts.

a.       External Debt (primarily Short Term Debt (STD) maturing in next 7 months)

b.      Current Account Deficit (CAD)

First, the issue of External Debt (ED). India's ED stood at $390 Bn as of March 31st, 2013 - Higher by 12.9% YOY or by $44.6 Bn. Of these, around $96.7 Bn is short term debt i.e. their maturity is within a year. And among the rest $293.4 Bn long term debt, 25.78% of them have to be repaid till March 2013.

The above image shows that India has to repay $172.346 Bn by March 2014!

And our Foreign Exchange Reserves stands at $ 278.602 Bn as of August 9, 2013.

Well, it seems OK?

No. This reserve has been falling quite drastically of late.

RBI Foreign Exchange Reserves:

The big negative figures are there for oil payments that mostly happen in the last week of every month. With Crude Oil heading higher in the world markets, expects the bleed to exacerbate in the coming months. 

RBI has lost close to $12 Bn so far this year and reversing this loss is little tough. Fall in rupee will certainly make our exports competitive going forward, infact last month's trade data gives inkling for the same, however, the effect will take some time to kick in.

Corporate India has an external debt outstanding of around $200 Bn as of March'2013. Out of these, around 45% is short term debt (i.e. $90 Bn). Worse, only 50% of it is hedged.

Thus, if rupee fell some 15% in the past few months, these 50% unhedged debts worth $45 Bn have made a dent of additional $6.75 Bn in the borrowers' balancesheets! On an average of Rs 57/USD, that’s Rs 38,475 Cr!

(Net Profit of 3137 companies for the June quarter was Rs 70,264.64 Crores.)

How bad is the situation?

Some facts:

STD-Short Term Debt; ForEx-Foreign Exchange Reserves;

Thus, although the situation has worsened since the 2008 crisis, its nowhere close to the situation we had in 1991.

Now let's look at the second leg of calculation: CAD

CAD for the year 2012-13 was at $87.8 Bn or 4.8% of GDP. CAD for this fiscal year is expected to be somewhere around $100-110 Bn. Much of last year's CAD was financed by short term money. Rest was through ECBs, Portfolio investments and Trade Credit.

Well, short term money is running out and ECBs have turned expensive. Portfolio investments are drying while trade credits are getting stricter.

Result? Expect a big dent in Foreign Reserves of RBI this year.

No wonder, RBI & GOI are trying anything and everything in their armor to cut down useless spending of Dollars.

But results are not encouraging so far. India imported 845 tonnes of gold last year! In the past 3 months, we have imported around 240.6 tonnes with 146 tonnes in May 2013 only as the gold prices crashed. Gold demand picks up during September and October due to festivals and no government control can stop Indians from buying gold during these periods. If they won't let them buy it fairly, the gold would reach through black markets!

Not just this, government has already spent more than 50% of its budgeted amount in the first 4 months of the fiscal year. Given this being an election year, it would be tough to contain fiscal deficit without stifling growth measures.

FIIs have invested close to Rs 73,000 Cr in the Indian bourses since Nov 2010 - under QE regime. QE tapering will pull this money out from a depreciating currency to an appreciating US currency.

The pressure on INR is here to stay and slowly but gradually, it will go down further. Rs 65 looks a fancy number and several analysts/economists are making the prediction for the same. I too feel 65 may be on the cards given the present scenario.

However, USD may not strengthen as much as it is being touted for. US has to resolve its debt ceiling issues once their ministers are back after August-break. That would make the markets very volatile, especially since it’s a politically sensitive issue there. That would make the investors to park their dollars in some safe places till the issues are resolved in their country. The other ray of hope is reversal of trade deficits that India is facing so far.

And also, if RBI/GOI do not make unnecessary mess!

Till then, enjoy the fall :)