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!