Huge investment by FIIs in this quarter

 The market is back with a bang — and this is not without reason, as Corporate India has put up an exceedingly good show for H1 FY07. The earnings surprise has led to a re-rating of the domestic market, driven by earnings upgrades and higher Indian exposure among overseas investors.

For the September ’06 quarter, foreign institutional investors (FIIs) were net buyers of around Rs 12,400 crore, which is the highest ever since the start of the bull run. While FIIs have been rushing to the market, domestic funds seem to be taking to the market more tactically, by collectively buying stocks worth Rs 1,686 in the latest quarter.

This is a fall from Rs 8,568 crore seen in the June quarter, when the market was seeing a broad correction. However, mutual funds (MFs) have definitely not exhibited the same enthusiasm as that shown by FIIs in the September quarter.

FIIs have increased their share of stock ownership in all Sensex scrips, except in Larsen & Toubro (L&T), Hindalco, Ranbaxy and Reliance Communications. The sharpest jump was seen in Reliance Energy, wherein the FII holdings rose to almost 20% from 14% in the last quarter.

The increasing FII exposure seems to have come off falling levels of MF holdings, with mutual funds reducing exposure in 15 out of 30 Sensex stocks.

However, domestic funds have been increasing exposures selectively in counters like Gujarat Ambuja, Hero Honda and Reliance Energy. Reliance Energy seems to be finding favour with both domestic and overseas funds.

However, Reliance Communications has been at the receiving end, with both domestic and overseas funds reducing exposure to the scrip. Stocks that saw a reduction in domestic fund exposures were HDFC, L&T, ICICI Bank, Tata Motors and Tata Steel. Clearly, domestic funds are buying selectively and acting cautious at current market levels.

Barring the index scrips, both MFs as well as domestic funds seem to be actively managing their portfolios. Some of the big exits by FIIs were Thermax, Navin Fluorine, Elecon Engineering and Man Engineering, where MFs have reduced exposure to zero levels. Other stocks where MF holdings seem to have dropped sharply are Bharat Electronics (BEL), i-flex solutions and PVR.

Domestic funds seem to be betting on the mid-cap segment, with their strongest additions being in Himatsingka Seide, Ceat and Kalpataru Power. Other strong additions include mid-cap banks like Union Bank of India, Bank of India and Bank of Baroda.  However, domestic funds have exited from some infrastructure construction companies like IVRCL and Nagarjuna, while adding relatively lower-priced mid-cap banks and financial service providers like LIC Housing Finance and IDFC during the quarter.

What’s interesting here is that in some counters, MFs seem to be providing FIIs with an entry into the stock. Examples of these counters are PVR, IVRCL, Educomp Solutions, Indiabulls Financial Services and Shoppers’ Stop. All of these have been witness to selling by domestic funds, only to be lapped up by FIIs.

Consider Indiabulls, which saw an around 2% reduction by domestic funds, but this was more than made up by a huge 12% increase in FII ownership. The same is the case for Educomp Solutions, in which domestic funds reduced their exposures by around 5%, while FIIs increased their stake by 7%.

There are also some instances of the reverse situation, with FIIs cashing out and domestic funds buying — these include LIC Housing Finance, Himatsingka Seide and KEC International.

Concurrent action was also visible in counters like Thermax — where both domestic and overseas funds have exited — and Kalpataru Power Transmission — where both have been buyers. Other scrips that have found favour with both groups include IDFC, Manugraph Industries and Gokaldas Exports.

Other major exits by FIIs, apart from the index space, during the quarter include Prajay Engineering, Astra Microwave, Alok Industries, Max India and Himachal Futuristic. However, despite higher flows from FIIs, there hasn’t been any significant change in the ownership profile, with percentages remaining more or less stagnant for both the Nifty and BSE 500.

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