Foreign institutional investors (FIIs) reduced stake in as many as 222 BSE companies, of which more than 80 percent gave negative returns in 2019, data showed.
Out of these 222 names, 52 companies eroded investor wealth as stocks fell 50-90 percent in 2019. The names include DHFL, Reliance Communications, CG Power, Thomas Cook and HCL Infosystems.
Foreign institutional investors dumped stocks that were showing signs of a slowdown, or the ones where companies had corporate governance issues.
“FIIs have reduced their stake in more than 222 companies which have given negative returns. These companies have their own fundamental flaws and are mid and small-cap companies. FIIs have shifted their exposure to bluechip stocks,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“Broader market indices have underperformed large-cap stocks for the last two years. Lack of interest in these stocks is due to poor earnings growth along with structural problems,” he said.
What should investors do?
Selling by foreign institutional investors could be due to a variety of reasons and not just ‘fundamental’ factors. However, it is one of the primary factors.
They have also reduced stake consistently in as many as 22 companies which rose 10-70 percent, including Jubilant FoodWorks, BF Investment, Trent, BF Utilities, Abbott India and Voltas.
Experts feel that it is best to avoid investing in companies that have defaulted on payments or has filed for bankruptcy.
“FIIs are very nimble-footed and therefore, are able to exit at the first signs of trouble. We would advise the retail investor to stay away from companies which have either closed operations or have filed for bankruptcy,” Atish Matlawala of SSJ Finance and Securities told Moneycontrol.
Garg of CapitalVia Global Research is of the view that one should keep themselves away from companies that fell 50-90% in 2019 in which FIIs have reduced stake.
“These companies have poor EPS growth, corporate governance issues, higher pledged shares etc. Investors should keep their portfolio diversified and should have more exposure to large-cap stocks having strong fundamentals,” he said.
Other parameters to watch:
Investors could use the list as a reference point and avoid the catching knife in this scenario. However, there are other parameters that one should study before pressing the sell button because deteriorating fundamentals can’t be the reason for every stock in which foreign investors reduced the stake, suggest experts.
“Investors should also be aware that some FII or institutions may sell as they might have reached to enormous profits and also have better buyers available for such large quantum. Hence it might not be necessary that the growth story of the company is over or retarded for a long time,” Pritam Deuskar, Fundamental Analyst, Bonanza Portfolio Ltdtold Moneycontrol.
“Investors should see total holding percentage pattern, if promoter + DII + FII hold good amount then stocks may stay high as long as growth continues. Earnings are the ultimate factor that drives the stock,” he said.
Deuskar further added that if the company has no other troubles and is showing YoY and QoQ growth in sales and profits, the positive bias in the stock will continue and it will keep trading higher. If factors responsible for growth come down or disturbed then institutions may start exiting.
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