Foreign institutional investors (FIIs) have in the last four quarters consistently raised stake in around 122 companies, most of which are in the small and midcap space, an indication that smart money has started moving in their direction.
Two consecutive years of consolidation in the broader market space has made it relatively more attractive for foreign investors. Largecap stocks are safe but have become slightly pricier when compared to mid & smallcaps.
“Small and mid-cap stocks have been underperforming for the past two years and some quality stocks are also trading below their fair price; hence these are lucrative opportunity and FIIs have also moved funds into this segment,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“Large-cap stocks are expensive and are trading at higher P/E multiples. Institutional investors, therefore, are backing midcap and small-cap stocks as there is scope for proportionately greater earnings. Funds have been flowing in this space due to favourable risk-to-reward,” he said.
Foreign investors lapped up stake in 122 companies on the BSE, according to shareholding data released on January 23.
Eight of these companies have more than doubled investor wealth in the last one year. These are Modern India, Ion Exchange, Apollo Tricoat, Aavas Financiers, Garden Reach, HDFC AMC, AGC Network, and ICICI Securities.
Stocks that have more than doubled investors' wealth in the last one year may not be a lucrative buy, say experts. Investors should focus on stocks that can deliver growth consistently in the long term.
“FII interest in Indian equities has improved, driven by stimulus measures by government as well as corporate tax rate cut. Most of the stocks, in which FII stake has increased meaningfully, are financially sound, have prudent management and promise better growth prospects for the coming quarters,” Ajit Mishra, VP- Research, Religare Broking Ltd, told Moneycontrol.
“Further, we believe companies such as HDFC AMC, Aavas financiers and Dixon tech. would continue to grow and outperform in their respective sectors”
Twenty-four stocks in which FIIs raised stake rose more than 50 percent in the last one year. These include Dr. Lal Pathlabs, SBI Life Insurance, HDFC Life Insurance, MCX, Avanti Feeds, and Granules India.
Nearly 50% gave negative returns
As many as 52 stocks of the 122 gave negative returns. Among them are HEG, Dishman Carbogen, Graphite India, Karur Vysya, Parag Milk, and Piramal Enterprises.Two years of consolidation in the broader market left many small & midcaps stocks registering selloff from their 52-week high levels.The steep fall could be attributed to corporate defaults, the slowdown in demand environment, company-specific regulatory issues, as well as failure to generate consistent earnings growth.Should investors consider as value buys the companies that have given negative returns in the last one year? Experts say investors should be selective. The list can at best be used to filter stocks but not all stocks which have given negative returns should be looked at as value buys.
“(In) the last one year we have seen a polarised market, with benchmark indices touching all-time highs with largecaps performing better than mid, smallcaps, largely due to money chasing few high-quality stocks,” Vinod Nair, Head of Research, Geojit Financial Services, told Moneycontrol.
“This was mainly due to the demand slowdown witnessed in the economy and the corresponding lack of earnings growth in most of the companies. Any negative developments, high leverage, regulatory, corporate governance issues, and muted earnings or revenue growth, etc., were punished heavily. It is not that all those stocks are a value buy since a lot will depend on the future outlook of their businesses.”
Atish Matlawala, Senior Analyst, SSJ Finance & Securities, is of the view that after a massive outperformance in 2017, mid and smallcaps saw a significant price correction in the last two years.
“Many of these (negative return) companies are either passing through difficult times in their business or are highly overvalued and hence, we believe these will continue to underperform for some time and hence do not recommend to buy these companies at the current juncture,” he said.
Few companies according to Matlawala are good buys that include names like Piramal Enterprise Ltd, Muthoot Capital Services and Future Consumer can be bought on dips from medium to long term perspective.
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