Analysts advice investors to stick to quality even in the small and midcap space which have been gaining momentum.
Foreign institutional investors (FIIs) might have turned net sellers in the last two months, but they have been consistently raising stake in individual companies which could deliver consistent growth rate.
FIIs raised stake in as many as 225 companies in the S&P BSE 500 index for the quarter ended September 30, while decreased in as many as 276 companies. The focus has been largely on small and midcap stocks.
Top ten stocks where they raised stake during the quarter includes names such as Indiabulls Real Estate, Delta Corp, Sunteck Realty, HFCL, KEC International, Bajaj Finance, Jindal Steel, Indiabulls Ventures, Jindal Stainless, SpiceJet, and Vakrangee.
These stocks have already more than doubled investors’ wealth so far in 2017. Indiabulls Ventures rose over 1000 percent, followed by Sunteck Realty which gained 250 percent, and Indiabulls Real Estate rose nearly 200 percent in the same period.
Stocks in which FIIs or FPIs have reduced their stake include names like KPIT Technologies, HDIL, Berger Paints, Jain Irrigations, Just Dial, Just Dial, Exide Industries, Max Financial, Indo Count Industries etc. among others.
Foreign investors have remained net sellers in four out of last nine months ending September. However, on a net basis, they have poured in over Rs 33,000 crore in Indian equity markets, according to SEBI data.
Foreign investors are pulling money out of India largely on account of profit booking thanks to high valuations and better investment opportunities in other emerging markets, suggest experts.
The sentiment is likely to remain tepid, thanks to higher valuations and absence of earnings growth, Saurabh Mukherjea, Ambit Capital said in an interview with CNBC-Tv18.
“What has happened in the last six months is a combination of circumstances -- valuations in India have gone up with a commensurate improvement in underlying fundamentals. The P/E multiple of Indian market shot through,” he said.
Alongside that, I keep hearing from my FIIs clients that other economies are recovering more tangibly in economies such as Japan, China, South East Asia etc. We as EM (emerging market) investors believe that they are a better bargain than India, explains Mukherjea.
In the last 12 months, on a net basis, they are net buyers to the tune of only Rs2300 crores. On the other hand, domestic institutional investors have poured in over Rs 80,000 crore in the same period.
Analysts advice investors to stick to quality even in the small and midcap space which have been gaining momentum. The S&P BSE Midcap and Smallcap indices made a fresh record high on Monday, 30 October.
Domestic liquidity is strong which is powered by retail investors’ money coming to equity markets via mutual fund route. The AUM or the asset under management has already topped over Rs20 lakh crore mark in September.
Both foreign investors and mutual fund investors are looking for growth and small and midcap stocks offer that option as compared to largecap stocks. Even if the economy grows by 4-5 percent, small and midcaps stocks should be able to post a decent growth.
“With high liquidity and investors looking for ‘value’ outside the large cap space, small & midcap stocks have seen significant appreciation. While the Nifty trade at 26x trailing PE, the small and midcap index is trading at historic highs of over 50x trailing PE,” Saurabh S Jain, MD, SSJ Finance & Securities told Moneycontrol.
The S&P BSE Midcap index is trading at a PE of 41.35x and a PB ratio of 2.87 while the S&P BSE Smallcap index is trading at a PE of 81.49x and a PB of 2.52, according to BSE India.
“Obviously, the valuations thereby leave significant room for disappointment on the earnings growth and ROE fronts in comparison to what valuations are implying,” he said.
However, Jain further added that there is a need for a constant reality check in terms of earnings growth potential in stocks which have given astronomical returns in the short run.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.