Can FIIs stage a comeback from here?

4 Dec 2023 , 02:48 PM

Shareholding of Foreign Portfolio Investors (FPIs) in the Indian markets currently stands at 16.6%, the lowest level over the past decade. Analysts at IIFL Capital Services took a deep dive into the FPI ownership in the Indian markets and came up with some interesting findings. But first, let us take a quick recap of what led to the current situation.

Thanks to the rising yields on the US 10-Year Government bonds over the past year, there has been an uptick in FPI selling from the Indian markets. The technical chart of the US 10Y Government Bond Yields tells us that there was a flag pattern breakout in early August. Subsequent to this breakout, FPIs have divested approximately Rs. 81,500 Crore worth of stocks in the cash market. The sellout caused the FPI long short ratio in speculative index futures position to go below 0.1x at the start of November. However, with the bond yields falling in the month of November, there has been a sharp recovery in FPI investments with Rs. 3,300 Crore buying in the cash market between November 15 to November 28 (9 trading days) and the FPI long short ratio in index future has risen to 0.32x during this period.

Amid high volatility in FPI flows, most investors are thinking, ‘Is this recovery sustainable?’

The answer to this question is a resounding yes. As the Indian GDP remains a shining star in an otherwise subdued global economy, analysts at IIFL Capital Services anticipate a resurgence of FPI interest in the Indian markets.

 

We now highlight the key trends witnessed in FPI shareholding in recent times:

FPIs are selling direct equity and investing through passive modes of investments: Outflow of FPI capital from the cash market does not necessarily mean that they are exiting India, given that FPIs are investing in India through passive investment modes. Foreign passive investments have consistently witnessed net inflows into India over the years, contributing approximately 42% ($6 billion) to the net FPI inflows in the secondary markets of India in 2023 so far. The Asset Under Management (AUM) for passive equity among FPIs have soared approximately 22% to reach $78 billion in the past one year. This rise in FII ETF AUM, coupled with an increase in the allocated weightage to India, has led to a proportional escalation in the share of FII ETFs in the overall FII equity ownership in India, advancing from 10.6% in August 2022 to 12.1% in August 2023.

Increasing focus on small-cap and mid-cap stocks: FPIs’ stake in large caps stands at 22.6% currently, considerably surpassing their holdings in small-cap and mid-cap stocks. However, FPI holdings in mid-cap stocks remains substantial at 13.8%, reflecting a notable increase of 1.1 percentage points. In comparison, the stake of Domestic Mutual Funds (DMFs) in mid-caps has seen a modest uptick of 0.4%, reaching 9.2%. If we look at the shareholding data for the last one year, we see that both FPIs and DMFs have increased their overall stake across market cap categories, while promoters have reduced their stake. Notably, both FPIs and DMFs have been prominent buyers of small-cap and mid-cap stocks during this period.

	NSE500	Large cap	Midcap	Smallcap
	Sep ’23	6m Δ(%)	Sep ’23	YoY Δ(%)	6m Δ(%)	Sep ’23	YoY Δ(%)	6m Δ(%)	Sep ’23	YoY Δ(%)	6m Δ(%)
Promoter	49.8	-1.1	47	-1.5	-1.2	56.4	-1.3	-0.9	55.1	-1.2	-0.5
Prom (ex. HDFCB)	51.8	-0.2	49.9	-0.3	0
FIIs	19.6	1.1	22.6	1.2	1.1	13.8	1.4	1.1	10.8	0.8	0.5
FIIs (ex. HDFCB)	17.9	0.5	20.4	0.4	0.3
MFs	9.1	0.3	9.2	0.5	0.2	9.8	0.8	0.4	8.6	1.1	0.6
Individuals	8.8	-0.1	7.9	0.0	0	9.1	-0.6	-0.3	14.1	-0.3	0
Others	12.7	-0.2	13.3	-0.1	0.1	11.5	-0.2	-0.3	11.4	-0.4	-0.5
Total Mcap ($bn)	3,490	2,418	702	370

Sectoral holdings and changes for FPI and DMFs: During the first two quarters of FY24, Indian equities witnessed a net inflow of $17.2 Billion from FPIs and $7 Billion from MFs. FPI stake in NSE500 as on September 2023 stood at 19.6%, up by 1.1% over the last 6 months. While the HDFC Bank-HDFC merger saw pickup in FII stake in HDFC Bank by ~15% (largely a shift from HDFC to HDFC Bank), even ex-HDFC Bank the FII stake in NSE500 inched up 0.5 ppt. Other sectors where FIIs increased stake in the last 6 months include Internet, Building Materials, and Automobiles. On the flip side, Logistics, Business Services and Gas Utilities witnessed selloffs. All in all, FIIs have above average holding (average being their own 19%) in private Banks (50.9%), Healthcare (32.3%), Internet (29.6%), and Auto (23.7%).

MFs have been buying continuously, and their stake in NSE500 is now 9.1%, up from 8.6% a year ago and 8.9% as on March 2023. Large-caps have seen the smallest stake increase by MFs at 0.2 ppt in the last 6 months, while small-caps saw the highest pickup at 0.6 ppt. DMFs also increased their stake across the board. Their above average holdings include private Banks, Pharma, EMS, Auto ancillaries and construction. In summary, share of FIIs and MFs in NSE500 index has moved up. The below image shows the sectoral holdings and changes for FIIs and DMFs within NSE500.

NSE 500 companies	Mcap	FII	MFs
Change in Shareholding	$bn	Sep ’23	6m Δ(%)	YoY Δ(%)	Sep ’23	6m Δ(%)	YoY Δ(%)
Technology	381	19	-0.4	-0.7	8.1	0.3	0.5
Private Banks	351	50.9	6.7	6.9	17.5	0.4	0.9
FMCG	287	15.3	0.1	0.4	6.3	0.3	0.4
Conglomerate	228	22.8	-0.6	-1.4	5.7	0.3	0.8
NBFC	172	12.6	-16.4	-17.6	7	-3.0	-2.5
Pharma	159	14.2	0.2	0	11.1	0.6	0.5
PSU Banks	153	7.2	0.7	1.1	7	-0.4	-0.4
Metals and mining	145	12.4	0.2	0.9	6.6	0.8	0.8
Automobiles	142	23.7	1.5	1.8	10.7	-0.1	0.9
Utilities	141	16.8	1.1	1.4	7.2	0.2	0.7
Capital goods	129	11.8	0.8	1.8	10.1	0	0
Retail	117	14.2	0.8	0.8	8.6	0.3	1.1
Insurance	112	12.7	0.5	0.6	5.1	0.2	0.3
Chemicals	103	10.7	-0.1	-0.2	7.5	0.1	0.4
telecommunication	97	18.5	0.4	-0.3	9	0.3	0.8
cement	87	13.1	0.4	0.8	10.6	0.5	0.9
Financial Services	80	9.8	1	0.6	5.5	0.8	1.2
Construction	72	23.2	0.9	2.7	13.9	-0.6	-0.7
Paints	48	15.5	0.5	-0.7	3	-0.3	-0.4
Auto ancilliaries	48	10.6	1.3	3	12.1	0.2	2.1
Real Estate	46	19.7	0.7	1.4	6.6	0.3	0.8
Defense	39	11.7	1.9	2.8	10.1	-1.2	-0.9
Healthcare	38	32.3	1.4	0.4	11.5	-0.6	-0.4
Upstream O&G	37	11.6	0.1	-0.7	7.7	0.1	0.9
Logistics	35	15.7	-2.2	0.9	6.4	0.6	0.1
Travel and leisure	33	15.9	0.8	1.5	11.8	0.6	1.7
Internet companies	31	29.6	4.9	9.7	8	1.7	3
OMCs	31	9.7	0.5	-0.2	6.1	0.3	0.7
Gas utilities	28	15	-1.5	-2.9	6.8	0.1	0.6
Consumer electricals	27	18.5	1.2	2.4	9.4	-0.2	-0.4
Building Materials	21	17.6	3.5	2.9	11.1	-1.5	-1
Tyre	15	17.6	0.6	1	10.7	0.3	0.7
agriculture	9	6.8	-0.8	-1.1	10.6	0.7	1.1
consumer goods	9	14.9	0.8	-1.2	15.4	0.4	0.8
media	9	18.8	-0.8	-1.3	11.8	1.2	3.0
EMS	7	13.1	3.5	0	12.9	2.9	6.2
Business services	2	16.9	-1.8	-3.3	9.2	2.1	2.7

 

What will drive FPIs comeback in India?

India’s Incremental Capital Output Ratio (ICOR) has been amongst the best across major countries over the past two decades. This bodes well for FDI flows into India in the coming years – while governments in other countries may prop up private sector ICORs through fiscal extensions / subsidies, the corresponding load on Indian fiscal position. will be lower relatively, and keep Government bond yields relatively benign, thus helping with interest costs indirectly. RBI continues to be upbeat on the economic momentum in India, an opinion seconded by renowned global rating agencies. Fitch and S&P Global Ratings, for instance, have upgraded India’s GDP growth forecast to 6.2% and 6.4% respectively for FY24. Considering the wobbly Global Economy indicators with M2/M3 growth in the US/EU running negative, inflation is still higher compared to the target in US/EU. Consumer confidence is struggling to gather pace as PMI for USA and China stays near the baseline of 50 while for EU it is in contraction zone since the last few months. In this scenario, India continues to be the single large investable country for FPIs. Hence, analysts at IIFL Capital Services believe that FPIs will make a strong comeback once the global scenario settles down.

Which sector could benefit from an increase in FII buying?

Analysts at IIFL Capital Services believe that the Capital Goods sector, currently characterized by a notable underweight position among FPI holdings, is poised to gain from an increase in FPI buying. The sector has witnessed a YoY improvement in operating margins by approximately 150-200 basis points, attributable to the completion of fixed-cost, low-margin projects initiated during the COVID era. The Transmission and Distribution orders continue to exhibit strength both in domestic and international markets, with a visible acceleration in the execution of civil projects anticipated in the lead-up to the general elections. The Government’s emphasis on capital expenditure is expected to augur well for the sector in the foreseeable future. Hence a positive outlook on the sector coupled with an increase in FII buying could benefit the capital goods sector.