Large-cap index stocks take a beating after results

Large-cap index stocks Reliance Industries (RIL), Hindustan Unilever (HUL) and Larsen & Toubro (L&T) lost between 2 and 3 per cent each over their previous close on Wednesday.

Analysts believe this to be a short-term blip and strongly feel that the long-term story is intact and that the fundamentals are in place.

These stocks were beaten down for a variety of reasons. For instance, RIL had reduced its gas output guidance for FY11 from 80 mmscmd to 60 mmscmd and for FY11 at 80 mmscmd at their Q1 analyst meet, said an equity analyst.

The fact that RIL overstepped on projections and the expectation of this delay in project execution has given people a reason to short the stock. For the RIL stock, Rs 1,045 was an important level and that has been breached. So expect some more pressure coupled with sideways movement,” said Mr Prakash Diwan, Head, Institutional Equity, Net Worth Stock Broking.

Result updates from some of the brokerages have pointed out that the delay in gas ramp-up is a dampener for RIL.

Another set of market players said that this could be an unwinding of long positions a day prior to F&O (futures and options) expiry and that better results expectations was the reason for build up in the stocks of RIL, HUL and L&T.

Ad spends and input costs have hurt HUL, say analysts. “Increase in the ad spend by 30 per cent year on year due to new brand launches and continuous increase in agri-commodities (prices) have taken its toll. Plus the inability to pass on costs to their customer has been their undoing,” added Mr Diwan.

Mr Alok Agarwal, Head of Research, Mata Securities, had another point of view to offer. He said, “HUL is already well owned by institutions. With Q1 numbers not encouraging, don't expect any further buy in.”

The late start to the capex cycle seems to have hurt L&T the most say analysts. “In spite of a good order book, late government disbursals for capex, and a delay in private sector capex resulted in a below expectation Q1 performance. Even a healthy margin could not save the stock from being beaten down; a sure sign of an overreacting street,” said Mr Diwan.

RIL closed at 1,021.25 (down 3.06 per cent), L&T at 1,823.65 (down 2.15 per cent) and HUL at 252.35 (down 3.09 per cent) on the NSE today.

“The more they fall, the better it is for the buyer as these are real blue chip companies to own,” added Mr Agarwal.

26 mutual funds waiting in the wings

Mumbai, Aug. 10 As many as 26 applications for setting up mutual funds arepending with the Securities and Exchange Board of India (SEBI) at various stages of approval. There are already 36 fund houses actively soliciting investments for over 2,000 schemes.
Room for more

Though retail investors have trouble selecting an MF scheme from among the thousands on offer, industry observers feel that there is headroom for many more to set up shop.

“In India, MF penetration is very low and the coverage in terms of the savings invested in mutual funds is also negligible,” said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.

With the top five MFs accounting for over 50 per cent of the total asset base, there is scope for more funds, said Mr Dhirendra Kumar, CEO of Value Research. The mutual fund industry manages an asset base of Rs 6,89,946 crore as on July end.

Those awaiting SEBI approval include IndiaBulls, India Infoline, Schroder Investment Management, Axis Bank, Sanlam Investment Management, ASK Investment Holdings Pvte Ltd, Karvy Stock Broking Ltd, Mahindra & Mahindra Financial Services, Union Bank a-KBC Asset Management and IDBI Bank.
Consolidation

With many more players foraying into the mutual fund space, some industry officials see scope for consolidation.

Some would even be coming in with a possible eye on for acquiring existing businesses, said Mr Kurian.

There might be consolidation in the future, with some marginal players wanting to exit and new and existing players taking over those businesses, said Mr Saurabh Nanavati, CEO of Religare Mutual Fund.

Metal stocks at 52-wk lows, Tata Steel down 6.5% ahead of results

Metal stocks touched fresh 52-week lows on Friday. Tata Steel, ahead of its results declaration, declined a whopping 6.5 per cent to Rs 195 while Hindalco plummeted 15.2 per cent to Rs 44.75.

Analysts point out that Tata Steel in its standalone operations (mainly domestic) is expected to report 36 per cent growth in net sales to Rs 6500 crore, driven by 32 per cent year on year growth in realisations and 4.1 per cent YoY growth in volumes.

Net profit for the second quarter ended September is forecast to rise 44 per cent y-o-y to Rs 1683 crore. However, the underlying concern is with regard to its European subsidiary Corus and its high exposure to spot steel prices.

Investor wealth plummets by Rs 36,50,000 crore in 9 months

The turmoil in the global markets has taken its toll on investors in domestic bourses which have suffered a loss of over Rs 36,50,000 crore in nine months since the benchmark Sensex scaled its life-time high on January 10. Country's most valued firm, Reliance Industries witnessed its market capitalisation fall to less than half to just Rs 2,39,804.62 crore at the end of trading on Wednesday from Rs 4,40,046.42 crore on January 10. The total investor wealth, measured in terms of market capitalisation of all the listed companies together, dipped to about Rs 36,50,000 crore on October 8 -- as against close to Rs 73,00,000 crore on January 10, when the benchmark Sensex scaled its life-time high before embarking on a southward journey. In the dollar terms, the loss has been even bigger as rupee has also depreciated sharply against the US currency. The cumulative market capitalisation of Indian companies stood at 1.8 trillion dollars on January 10, which today came down to 760 billion dollars, as rupee fell from 39.26 per dollar to near 48-level today. Other blue chip firms which lost heavily during the nine months period include ONGC whose market cap dropped by over Rs 70,000 crore in the period and telecom major Bharti Airtel's witnessed a loss of over Rs 44,000 crore in the period under review. While country's largest lender SBI has lost close to Rs 69,000 crore in its market capitalisation since the peak in January till October 8. The 30-share index, on Wednesday, fell to as low as 10,750.76 points -- its lowest in more than two years --before ending the day at 11,328.26 points after some recovery. In the overall loss of close to Rs 36,50,000 crore, the company promoters have seen an erosion of over Rs 20,00,000 crore with their holding of about 60 per cent. After promoters, FIIs have taken the biggest hit with a loss of over Rs 4,00,000 crore, while retail investors have lost more than Rs 3,00,000 crore. The banks, mutual funds and insurance companies have also seen the value of their holdings plunge by close to Rs 3,00,000 crore. Attributing the fall in stock markets to happenings in the US and other Asian markets, Finance Minister P Chidambaram has cautioned against any hasty decisions by investors as fundamentals of the Indian economy are strong

Sensex emerges as the best of the world indices

After suffering the ignominy of languishing among the worst-performing markets for the past few months, matters have slightly improved for India. Outlook on equities continues to remains dismal —barring the occasional surge — but Indian equities have shown better resilience than what most market watchers had expected it to.

After a fall in more than a third of its value in the six months of CY2008, the Sensex has rebounded remarkably to become the best-performing index amongst major indices in the last month.

Easing of crude prices has provided some relief to the bulls who have been battling a flood of negative newsflow for the past few months. The price of crude has fallen by 20% from its peak of close to $150 a barrel. This has reduced the inflationary pressures to some extent, though experts feel it is too early to celebrate.

Indian shares, one of the worst performers in the first six months of the year, is gradually regaining some of its lost ground. A return to a degree of political stability after the trust vote as well as the strengthening rupee made Sensex the outperformer in the list of major global indices. The BSE Sensex recorded a rise of 18% in the period since July 15 — the day when all global markets were at their latest bottom. Capital goods, banks and realty — the sectors most impacted in the crash propelled the resurgence. Those sectors possess a high beta — indicating a greater correlation to the benchmark index, which entails that these sectors outperform the index in good times.

Banking sector may see tough days ahead: Analysts

After taking a hit on their bottomlines in the first quarter of this fiscal, the Indian banks are likely to remain in tough terrains in the face of the tightening macro-economic environment, analysts say.

Bottomlines of banks in the first quarter of financial year 2009 were hit by higher than expected mark-to-market (MTM) losses and lower treasury incomes, as per an earnings review of banking sector by domestic brokerage firm Sharekhan.

“Most of the banks under our coverage witnessed margin pressures during the quarter, in line with the recent rate hikes announced by the RBI. Further, a weaker treasury performance on account of the higher bond yields, the downturn in the equity markets and the high base of the last year added to the woes of banks,” the Sharekhan report said.

However, the banks themselves are putting a brave face and dismiss the talks of any slowdown in the sector. Disagreeing to the view that there is a slowdown in the banking space, Indian Bank Chairman and Managing Director Mr M S Sundara Rajan said, “Ther e is no slowdown at all. Indian Bank had a credit growth of 4,200 crore in the first quarter this year as against Rs 800 crore last year. There is high demand from every industry including power, telecom, infrastructure, cement, sugar or composite sugar mills.”

The highlight of the quarter was the MTM provisions, which significantly affected the earnings of the banks. The quarter gone by saw a significant spike in bond yields, resulting in high MTM provisions on banks' bond portfolios, the report said.

Banks with higher proportion of their investment portfolio held in the 'available for sale' category had significantly higher MTM losses during the quarter, it added. - PTI

Dalal Street proves tough for Anil Ambani; Infratel IPO scrapped

The stock market woes for India's second richest person Mr Anil Ambani, it seems, are unending with Reliance Infratel scrapping its estimated Rs 6,000-crore IPO plans for now - amid huge secondary market loss for the group companies.

Reliance Infratel, the tower business arm of the group's telecom entity Reliance Communications, has allowed the regulatory approval to lapse without coming out with an IPO and is unlikely to revive the process soon.

A company spokesperson did not take queries on lapse of the approval period and on whether the company was looking to revive the process by filing a fresh draft IPO prospectus with market regulator SEBI.

On the secondary market, Reliance Infrastructure, formerly Reliance Energy, has logged the biggest loss among the top 30 blue-chip companies in the country in the seven- month downslide at the bourses and the group as whole has lost market value worth ov er Rs 2,00,000 crore in the same period.

The public offer, which was planned, had got a regulatory go-ahead with SEBI's issuance of observations on the draft red herring prospectus (DRHP) on May 12. As per the norms, it was required to close the IPO within 90 days of issuance of SEBI's observat ion - the period that ended on August 11.

The group had announced the IPO for telecom tower firm Reliance Infratel, which was estimated to raise close to Rs 6,000 crore in February after a stupendous response to Reliance Power initial offer, which raised over Rs 10,000 crore and was the the grou p's first ever public issue.

The record response notwithstanding, Reliance Power met with a dismal response at the time of its listing, which happened days within the Reliance Infratel IPO being announced. - PTI

Indian Hotels plans to invest Rs 2,100 cr; will stay invested in Orient

Mumbai, Aug. 14 Indian Hotels Company (IHCL), operators of the Taj Group of Hotels, plans to invest Rs 2,100 crore to add 5,900 rooms in the next three years.

The Chairman of the Tatas-owned company, Mr Ratan Tata, told shareholders at the company’s annual general meeting on Thursday: “We plan to invest Rs 1,500 crore over the next three years to add about 1,900 rooms in the five-star and luxury category, and Rs 600 crore to add around 4,000 rooms in the premium and budget segments.”

Replying to a shareholder’s query on the company’s investment in the US-based Orient-Express Hotels Ltd, Mr Tata said: “Orient Express have a certain set of iconic standalone hotels and taking a small stake in it was expressing our interest in working with them.

“It was misunderstood (by Orient Express) to be an attempt to try and get involved in a hostile manner with the company.”

IHCL acquired a 11.57 per cent stake in Orient Express in 2007 for about Rs 1,000 crore ($246.9 million) and had proposed an alliance which the latter rebuffed.

Mr Tata added: “If ever we were to get involved with that hotel on a friendly basis, I think it would be a tremendous addition to our portfolio but there is no way that we would make a hostile attempt on that company.”

Later Mr Tata told us : “One should not read much into our (Orient Hotel) investment.”

The Director of Tata Sons, Mr R.K. Krishna Kumar, said “we would stay invested.”

The share price of Indian Hotels closed flat at Rs 79.90 on Thursday

High inflation turns marketmen extra cautious

Mumbai, Aug. 14 Surprising marketmen on Thursday was the higher-than-expected inflation figure. Thanks to the high fruit and crude price, inflation sky-rocketed to 12.44 per cent for the week ended August 2 from 12.01 per cent in the previous week. A Ministry of Finance statement said that “after being nearly stable for four weeks, this rise has come has a major disappointment.” Marketmen too echoed this thought.

“The figure came as a surprise, as it was much higher than what we were expecting. We were expecting it to be around 12.3 per cent. It won’t be surprising if the central bank will take further measures to reduce the excess liquidity,” said Mr Hitesh Agarwal, Head of Research, Angel Broking.

Fruit prices surged almost 9 per cent, light diesel oil climbed 16 per cent and aviation turbine fuel by 3 per cent. The prices of pulses dropped 1.4 per cent and vegetables by 3.7 per cent.

Playing safe

Investors could have been anticipating high inflation figures, said analysts, which could be one of the reasons why the markets ended the day in the red. “There was definitely some amount of nervousness in the market today, especially during the last few hours of trade. There could have been people who knew the figure before hand and or some of them might be playing it safe before the long weekend ahead,” said Ms Anita Gandhi, Head of Institutional Business, Arihant Capital Market.

Mr Agarwal said that interest-sensitive sectors such as banking and realty witnessed the most selling today. The BSE Realty was down close to 8 per cent and the BSE Bankex 5 per cent.

Those who thought that the inflation would touch 13 per cent in a few months, now feel that this could happen in a few weeks time. Inflation could reach as high as 13 per cent in less than a month, as already we are at 12.44 per cent and 13 per cent is not very far away,” said Mr V.K. Sharma, Whole Time Director and Head of Research at Anagram Stock Broking.

Looking ahead

Mr Prashant Bhansali, Director, Mehta Equities, said that once inflation reaches 13 per cent, we could see it stabilise and gradually decline. A recent report by Enam Securities stated that inflation could see a peak of around 13 per cent before easing.

As for what one can expect on Monday, marketmen said that we have to see how the global markets behave in the next two days, as well as the direction of the crude prices.

“We should look at how the US markets perform in the next two days and the price of crude. There is likely to be a knee-jerk reaction on Monday,” said Mr Agarwal. “If we assume that all things remain normal and take into consideration the high inflation figure, the markets will definitely react negatively to this,” said a head of research at a domestic brokerage.

Private provident funds allowed to invest up to 15% in stocks

New Delhi, Aug. 14 Private sector managed provident fund and superannuation trusts can now have greater exposure in the stock markets.

They can soon directly invest up to 15 per cent of their investible funds in shares of companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

This has been provided in the new investment pattern for non-government provident, superannuation and gratuity funds issued by the Finance Ministry here today.

The new investment pattern, which would come into force from April 1, 2009, has been issued after factoring in the developments in the financial market and economy.

They have been revised to make it more flexible and give the trustees of these funds more autonomy and discretion. The investment pattern was last revised on January 24, 2005.

At the draft stage of these new guidelines, the Government was looking to allow these funds to invest upto 10 per cent of their portfolio in shares of companies that had an investment grade debt rating from a credit rating agency. It was also proposed to allow investments in shares of BSE Sensex and NSE Nifty companies and equity-linked schemes of mutual funds.

Official sources said that the latest move to specify the investment universe as those on which derivatives are available was intended to ensure that these PF, gratuity and superannuation funds get invested in good quality stocks with large trading volumes and market capitalisation.

“We don’t want these non-government PF trusts to get saddled with illiquid stocks. Non-government PF trusts are being allowed to invest in high liquidity shares and so the linkage to derivatives; we have now allowed for greater exposure of 15 per cent as against the earlier planned 10 per cent”, sources said.

Currently, about 228 single stock futures are traded in the futures and options segment of NSE, with about 39 more to be added from the last week of August.

The other changes made in the investment pattern include merger of Central Government Securities, State Government Securities and units of gilt Mutual Funds into a single category and allowing investment up to 55 per cent of the investible funds; providing a flexible ceiling for various category of instruments instead of fixed investment ceiling as at present; providing new category of instruments, such as rupee bonds of multilateral funding agencies, money market instruments and permitting investment in term deposit receipts of not less than one year duration issued by scheduled commercial banks.

The new investment pattern also recognises the fiduciary responsibility of the trustees and the need for exercise of due diligence by them. It gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio.

Moreover, the trustees will have freedom to exit from a rated financial instrument when their rating falls below investment grade as confirmed by one credit rating agency;

The trustees have also been given freedom of trading in securities, subject to the turnover ratio (i.e., the value of securities traded in the year divided by average value of the portfolio at the beginning and end of the year) not exceeding two.

Equity markets may rebound by early 2009

China and India have suffered the biggest fall in the global equity market slump over the past six months but a possible recovery may ensue by early 2009, the Prime Minister's Economic Advisory Council said on Wednesday.

"Both emerging and development markets are down with China and India having dropped the most, developed countries by relatively less and commodity exporting countries like South Africa, Brazil, Russia and Soudi Arabia the least," the EAC said in its latest economic outlook for the current fiscal.

The Shanghai Stock Exchange has registered maximum fall (56 per cent) from its peak, while the benchmark index of the Bombay Stock Exchange dipped by as much as 40 per cent and the Manila Stock Exchange dropped by 39 per cent, registering the third largest fall.

The report added that "having lost one fifth to one third of their value, equity assets would appear to have greater upside rather than down side prospects. If there are no major further shocks, a slow albeit hesitant recovery may be envisaged."

China stocks end lower; data confirms slowdown

China's main stock index fell for a fifth straight day on Thursday, to a fresh 19-month closing low, after data on industrial production and money supply appeared to confirm that the economy was slowing.

The Shanghai Composite Index ended down 0.38 per cent at 2,437.082 points, off an intra-day low of 2,409.010. Turnover in Shanghai A shares shrank to 27.6 billion yuan ($4.0 billion), its lowest level since November 2006, from Wednesday's 35.2 billion yuan.

The government said on Thursday that annual factory output growth slowed to 14.7 per cent in July, a 19-month low and down from 16.0 per cent in June, as manufacturers struggled with weakening export demand and rising input costs.

The market had expected July growth of 15.9 per cent.

"The figure will intensify the market's worry about an economic slowdown," said Lu Zhenwei, chief economist at Industrial Bank in Shanghai. "Although exports still seem strong in value terms, I think that's a bit exaggerated. Export growth is still trending down, which is affecting industrial output."

Industrial growth in June slows to 5.4%

Our Bureau

New Delhi, Aug. 12 Amid a continuing lacklustre performance by the core sector, industrial output registered a modest 5.4 per cent growth in June 2008 compared with a much higher 8.9 per cent rise in production recorded a year ago.

The growth in June, however, was higher than the upward-revised 4.1 per cent growth estimated in May this year, with both manufacturing output and electricity generation picking up on a sequential basis despite a downward trend year-on-year. The continuing recovery by the consumer durables sector during the latest reported month was accompanied by a sequential jump in output in case of the crucial capital goods sector.

Meanwhile, the key infrastructure industries, which contribute slightly over one-fourth of the Index of Industrial Production, grew 3.4 per cent in June against a 5.2 per cent rise in output a year ago, according to latest estimates released by the Ministry of Commerce and Industry on Tuesday.

The IIP figures announced by the Central Statistical Organisation showed a partial recovery on a sequential basis in manufacturing output, which accounts for nearly four-fifth of the total weight of the Index.

Manufacturing output rose 5.9 per cent in June compared with a 4.2 per cent in May, even though the estimates were way below the 9.7 per cent growth recorded a year ago.

The electricity sector also showed a rebound, growing 2.6 per cent during June against the 1.2 per cent in the previous month.

The estimates were lower than the 6.8 per cent growth recorded in electricity generation recorded a year ago. The mining sector grew 2.9 per cent in June, sharply lower than the growth estimate of 5.1 per cent in May but higher than the 1.5 per cent recorded in June 2007.

For the April-June quarter, industrial production growth slowed to 5.2 per cent, down from 7.1 per cent in the same period a year earlier.

Use-based classification of the IIP shows that the consumer durables sector gathered momentum in June, registering a growth of 3.5 per cent against a negative 3.6 per cent estimated last year and May’s 2.6 per cent growth, pushing up the overall consumer sector growth to 10 per cent.

The capital goods registered a 5.6 per cent growth in output in June 2008, higher than the 3.4 per cent witnessed in May.

TCS, Infy & Wipro marching ahead

Tata Consultancy Services (TCS), Infosys Technologies and Wipro Technologies, collectively referred as 'India-3', will emerge as the next generation of IT service megavendors, according to Gartner, Inc.

These vendors are increasingly being considered for strategic service deals, and will augment or, in some cases, replace today's acknowledged megavendors by revenue - IBM Global Services, Accenture and EDS - in this space by 2011.

These emerging megavendors are much smaller than the current megavendors but will increasingly compete for the same megadeals that had been the exclusive domain of the incumbent megavendors

Fertiliser shares find buyers on new urea investment policy

With the long-awaited new urea investment policy finally coming into place, fertiliser companies have more than one reason to smile, and which is clearly reflected in their share prices.

The policy is expected to encourage fresh investments into the sector, leading to capacity expansion. It would also boost the flagging urea production, reducing the country's dependence on imports.

"The Cabinet Committee on Economic Affairs has approved a new fertilizer policy which is long term, realistic and farmer friendly," said Shruti Bhargava, analyst at Networth Stock Broking.

The new policy aims at attracting investments in the urea sector by resumption and expansion of existing units to meet the set target of 40 mn of urea by 2012. This includes reviving eight units of Fertilizer Corporation of India and Hindustan Fertilizer Corporation.

At present, India produces 21 mn tonne of urea as against the rising demand of 27-28 mn tonne, which it has been filling through imports.

Under the new norms, the international price-parity formula for domestic urea manufacturers would be adopted for calculation of subsidy and cost of production. Existing units producing additional urea will get an import parity price of 85 per cent in the price band of $250-425 a tonne while that for expanding units it would be 90 per cent.

BSNL's $10 bn IPO hopes to buck frail market

State-owned phone company's plans to raise $10 billion in the biggest local IPO must overcome waning foreign investor interest in a country whose share markets have dropped by a quarter this year.

There has been no timeline for Bharat Sanchar Nigam's (BSNL) IPO, but the company expects the issue in six months.

Bankers said the target can be met only if the process is fast tracked and other issues such as union opposition are ironed out. While smaller IPOs have been completed this year despite the market selloff, thanks to a large pool of willing local investors, the biggest deals will struggle without foreign participation.

"For foreign funds, equity is definitely no longer the preferred asset class," said Jayesh Shroff, who helps oversee about $3.5 billion at SBI Mutual Fund. "They are quite wary of it and Indian IPOs do not fit their strategy now." Andrew Holland, managing director of strategic investment group at DSP Merrill Lynch, said poor secondary markets, the global credit crunch and nervousness about weakening growth forecasts for India have kept foreign funds on the sidelines.

The government said in January it aimed to list BSNL by selling 10 per cent, but put the plan on hold after opposition from its communist allies and trade unions. India's biggest IPO, January's $3 billion offer from Reliance Power, was subscribed within minutes of opening, helped by big institutional funds.

Foreign funds own 4.7 per cent of the firm or nearly half the stake sold in the initial public offer. Its success was due in part to heavy subscription from foreign hedge funds, overseas banks and portfolio managers. But in July, UTI Asset Management, India's oldest mutual fund, put off a $480 million IPO, joining other heavyweight listing candidates on the sidelines after foreign funds wanted the valuation cut by a quarter.

"It all depends on market sentiment. There is clearly a flavour for public sector stocks but pricing is the key," said Paras Adenwalla, chief investment officer at ING Asset Management (India). "Will a large IPO be subscribed, yes. But the question will be is there anything left on the table for investors to make money after the listing." Some bankers have also said big issues were unlikely to be completed ahead of national elections due by May.

At least 10 firms have delayed or shelved IPOs worth about $4 billion this year due to sluggish demand amid a deep market slide. And the outlook remains downbeat for the rest of the year, in line with the global trend.

"There is a wariness towards taking fresh positions in Indian offerings," said S. Ramesh, chief operating officer at Kotak Mahindra Capital. India's central bank has raised interest rates to a 7-year high of 9 per cent in a bid to tame inflation of close to 12 per cent, and analysts have cut economic growth forecasts and corporate profit appears to be slowing.
Firms looking to raise relatively smaller amounts of about 1 billion rupees ($24 million) have, however, managed to scrape through in the last four months helped largely by support from local banks, domestic mutual funds and wealthy individuals. About 10 firms have raised a total of nearly 4.5 billion rupees over the last three months, while two companies hope to raise as much as 2.5 billion rupees in the next two weeks. Indian IPO proceeds fell 7 per cent in January-June to $4.3 billion, data show. Total share sales, including IPOs, fell to $615 million in April-June, the lowest since the last quarter of 2003. Kotak Mahindra Capital's Ramesh said the lull would continue this year, but demand could pick up in early 2009 when global and Indian markets are expected to stabilise.

FII activity in 2008 — Still some glimmer of hope

FIIs are not unabashedly bullish about the Indian stock market any more, as is evident from the $6.4 billion of net redemptions by them so far in 2008. That accounts for about 11 per cent of the cumulative investments put in by them since they first started investing in India in 1993.

However, if these numbers bring to mind an image of FIIs scrambling en masse to the exit doors, that may not be entirely right either.

In the first seven months of 2008, registrations by FIIs seeking an entry into Indian markets have continued to climb. Gross purchases by FIIs, the actual indicator of foreign investor activity in India, are greater than last year. And shareholding pattern disclosures for June show that the FIIs have increased their stakes in quite a few stocks in the mid- and small-cap spaces.

This article looks at some of these trends and identifies stocks that featured in the FIIs’ buy list in the last quarter. .

Higher registrations

Total FII registrations with SEBI, which were 1,219 in December 2007, were 1,457 at end-July. New registrations by FIIs, which slowed between February and April, went up significantly between May and July. January, when the stock market touched its pinnacle at 21k, saw 60 new FIIs and 151 sub-accounts being registered.

The number of new registrations, however, dwindled with the correction, to bottom out at just 15k in April 2008. The months that followed did see a revival in registrations, though, with 54 FIIs and 113 sub-accounts registered in July. In the last three months, 123 new foreign institutions registered with SEBI.

There was a sharp increase in the number of sub-accounts too (376). The new entrants may not rush to make their first investments in Indian stocks; but the pick-up in registrations is surely indicative of sustained FII interest in the Indian markets.

Last year’s crackdown on investments through the participatory note route has probably prompted investors with more long-term India ambitions to register with SEBI, despite the more stringent disclosure norms.

A profile of the new registrants shows quite a few institutions from West Asia — particularly Qatar, Oman and the United Arab Emirates. Also seen were institutions from Poland, the Netherlands, Ireland and France, apart from FII havens such as the US, Singapore, Mauritius and the UK.

Quite a few of the registrants were pension funds and insurance companies, suggesting that their investments in stocks, as and when they happen, may be of a lasting nature; the entities include Qatar Insurance, The Financial Corporation (Oman), College Retirement Equities Fund (US), Amansa Capital (long-term returns; US), UPMC Health System (US), National Social Security Fund (China). One interesting registration in July was from Nalanda India Fund, a PE firm investing only in public enterprises.

Higher gross purchases

It is usual, when analysing FII data, to look at the “net” picture alone — that is, the difference between the total purchases and sales put through by FIIs. But what has been happening to “gross” purchases, which are more reflective of the total quantum of buying or selling by FIIs in a period?

Though FIIs have recorded net sales of Rs 5,36,800 crore so far in 2008, their gross purchases during the year were significantly higher than last year, totalling to Rs 4,93,884 crore till end-July, or 28 per cent higher than the gross purchases recorded in the corresponding period last year (Rs 3,83,957 crore). Of course, gross sales too have been much higher, at Rs 5,23,650 crore, against Rs 3,41,153 crore last year, resulting in a net sale of stocks.

However, the gross data certainly shows that overall FII interest in Indian stocks has, if anything, risen this year and that, for every FII in exit mode, there are others willing to pump money into this market.

It is also possible that the FIIs which sold their holdings invested in new-found opportunities. The pace of FII ‘net’ selling in the Indian market also decelerated in recent months, from a level of Rs 5,011.50 crore in May, to Rs 1,445 crore in July. So, if FIIs have been pumping money selectively into the stock market, what have they been buying?

On screening the stocks in the BSE-500, the April-June quarter saw 190 stocks registering an increase in FII holdings. Interestingly, of the lot, there were 35 large-cap stocks (market capitalisation of over Rs 7,500 crore), while the others were all mid- and small-caps. In the list of stocks that saw a significant (4 per cent plus) increase in FII holdings, there were seven stocks in the small-cap and five stocks in the mid-cap space.

The only stock from the large-cap space was Cairn India. But the space where FIIs chose to rejig their portfolios most significantly (sales and purchases of over 4 per cent) was in the small-caps. The number of small-cap stocks recording a big net “decrease” in FII holdings was much higher than the number which saw an increase.

Bulk Deals Route

FIIs displayed no specific sector bias and acquired and sold stocks from a range of sectors. Also, they didn’t ramp up stakes on too many large-caps, nor did they reduce them. But for ACC (which saw a 6 per cent fall in FII stakes), no large-cap stock saw a fall in FII holding of over 4 per cent. The assumption that some FIIs could have sold their holdings to invest in new stocks is also supported by disclosures made to the exchanges on bulk deals. Such players as Morgan Stanley, Merrill Lynch Capital Markets, Fidelity Investments and Goldman Sachs Investments were seen re-shuffling their portfolios and were active on both the buy and sell sides. Morgan Stanley was seen selling Balrampur Chini, Elder Pharma, Gujarat NRE Coke, and buying LIC Housing Finance, Shree Renuka Sugars and Temptation foods. Fidelity Funds, on the other hand, sold Saregama, Piramal Life Sciences, ING Vysya Bank, Britannia Industries, Apollo Hospitals, Alembic and bought , Rallis India and Titan Industries.

July, in particular, saw fresh buying by FIIs that registered late last year — Credit Suisse Singapore and CLSA Mauritius, among others such as Warhol, Swiss Finance and Morgan Stanley, that continued to display optimism. The major selling in the last two months was by Deutsche Securities, Templeton Mutual Fund and ABN Amro Bank.

The moves by FIIs were company-specific and provided no signals as to their overall stance on sectors. With sufficient proof that FIIs haven’t deserted India, domestic investors may look for some suitable stocks to add to their portfolios at present.

Beaten-down sectors lead the rally

What is the investment that can deliver a 20 per cent return in three weeks? Believe it or not, the answer is still ‘stocks’.

As many as 417 stocks have gained 20 per cent or more during the recovery in the stock markets over the past three weeks. As many as 23 of these have appreciated by over 50 per cent, with a couple (Shriram EPC and Sabero Organics) even doubling in value.

As the BSE Sensex bottomed out at 12600 levels on July 16 and climbed back over the next three weeks to 15000 levels, it has managed a 20.6 per cent return. The stocks which beat the index were not mainly penny stocks, as you would expect.

Punj Lloyd (up 45 per cent), HDFC (up 44 per cent), DLF (41 per cent), HDFC Bank (39 per cent) are some of the frontline stocks that substantially outpaced the Sensex. Stocks from unlikely sectors such as sugar, banking and realty have led the rally.

Expectations of reforms drove stocks of public sector banks, to the top of the gainers list. SBI, Union Bank of India, Indian Bank and Bank of Baroda rose between 34 and 46 per cent.

Realty majors – DLF, Unitech and Kolte Patil Developers – delivered between 30 and 63 per cent returns. Among private sector banks and financial institutions, ICICI Bank, IDBI Bank, Edelweiss Capital and Reliance Capital rose between 38 and 46 per cent.

These sectors are interest rate sensitive and declining crude oil prices have triggered hopes that interest rates could soon peak out. Beaten down valuations may also explain the buying interest in these stocks.

Sakthi Sugars, Dharani Sugars, Dwarikesh Sugar and EID Parry gained between 42 and 70 per cent, as sugar prices rose on expectations of a drop in output next year. Stocks such as RNRL, Shriram EPC, Adlabs Films, HMT and Jet Airways may not have had any specific triggers, but delivered 39 to 105 per cent returns.

Large cap stocks outpaced mid and small-caps, as buying interest first revived in the frontliners. Stocks with a high PE multiple delivered better returns in this rally than those with a low PE ratio, also reflecting the fact that investors preferred to buy better-known names.

Stocks that managed to beat the Sensex had an average PE of 20.7 times (trailing earnings), higher than the Sensex PE of 18.8 times. Those which trailed the index sported a PE of 17.8 times, at a discount to the index.

FIIs have been net buyers to the tune of Rs 2,252 crore in Indian stocks since July 16, while domestic mutual funds have bought Rs 583.9 crore worth of equity.