Should You Buy the Stocks FIIs are Selling?

A record Rs 4 tn exited the Indian equity market in a matter of 15 months, between January 2021 and June 2022, all thanks to persistent selling by FIIs.

Between October 2021 and March 2022, foreign institutional investors (FIIs) sold Rs 1.8 tn worth of investment in Indian equities. Now compare this with the global market crisis of 2008 when the FIIs sold equities in the range of Rs 529 bn.

The trend right now is going in the reverse direction. There's less buying and more selling.

This has taken foreign investment in the Indian stock market to its lowest ever in over 10 years.

Is that the reason why the stock market is falling? Perhaps yes.

The Shift in FII Sentiment for the Indian Stock Market

This brings to my next important question - why FIIs are selling in India?

What changed between these two very significant years in financial history that led to offloading such enormous FII holdings in the last 15 months?

A combination of factors led to this relentless selling.

Central banks tightened liquidity. The dollar became stronger. Add to that, the rising inflation across the globe. Plus, the Russia - Ukraine war added fuel to the fire.

Until now, the central banks pumped more money into the system. Additionally, they purchased bonds from financial institutions and commercial banks. This is to keep the interest rates under control.

But this is not a permanent solution as central banks cannot continue to purchase bonds in perpetuity to reduce liquidity in the system.

Ultimately, the interest rates are rising once again worldwide.

This prompted foreign investors to pull out their investments from emerging markets such as India and invest in countries benefiting from war like Brazil and Indonesia. The inclination is to invest their funds in treasury bonds in more developed and robust markets.

Where Did India Go Wrong?

The Reserve Bank of India (RBI) hiked interest rates in the middle of this turmoil. Needless to say, this has not helped the situation at all.

It's common knowledge that the profitability of companies declines in a market where interest rates are sky high. As a result, FIIs are no longer willing to pay astronomical valuations for Indian equities and are therefore pulling out their money from the market.

Understandably, some companies have lost out more in comparison to others.

Here is a list of the top 4 Indian companies that have seen FIIs decreased their stake significantly despite them being fundamentally strong stock and a great track record.

#1 Hero MotoCorp

Hero MotoCorp, formerly known as Hero Honda is one of the largest two wheeler manufacturers in the world. Established in 1984, the company started out as a technological collaboration with Japan's Honda but the two entities parted ways in 2011.

In the financial year 2020-21, Hero MotoCorp had a 37.1% market share in India with a manufacturing capacity of 9.5 m units per year.

Hero currently has an international presence across 40+ countries. With over 25,000 retailers nationwide, the company is home to iconic two wheeler brands like Splendor, Passion and Glamour in the bike segment.

The company collaborated with the world famous Harley Davidson to develop a range of premium motorcycles. It is also focusing on expanding its reach in the electric vehicles (EV) segment through tie ups with Ather and HeroHatch.

Dial back to 2014 when the RBI allowed foreign investors to purchase up to 49% stake of paid up capital in Hero MotoCorp.

Fast forward to the financial year 2021-22 when these same FIIs are keen to sell their stake. As of June 2022, FII holdings in the company stand at 29.2% compared to 35.2% in June 2019.

Despite FIIs selling their investment, Hero MotoCorp has delivered a 22% return on equity (ROE) over the last 5 years.

The company is almost debt free.

For more details, check out Hero MotoCorp's latest shareholding pattern.

#2 SBI Life Insurance Company

SBI Life Insurance began its journey as a joint venture between the State Bank of India and BNP Paribas Cardif S.A. in 2000. It is one of the largest and most trusted private life insurance companies in India.

The company offers a range of insurance products including individual and group protection, pension, savings, and health solutions through its multi-channel distribution network.

Currently, the share price of SBI Life is somewhere in the range of Rs 1,100 apiece.

In the fourth quarter of the fiscal year 2020-21, the FII holdings stand at 24.2%. This is a drop of almost 7% from the same quarter a year ago, when the FII stake stood at 30.5%.

That said, the company has achieved a compounded growth of 22% over the last 5 years. The ROE stands at a reasonably good 16% during the same time period.

SBI Life Insurance is almost debt free.

Taking into account the strong combination of brand and distribution, the company is one of the formidable players in the financial sector to deliver a robust Annual premium equivalent (APE) growth with a sustained margin expansion.

For more details, check out SBI Life's latest shareholding pattern.

#3 HCL Technologies

HCL Technologies was founded in 1991 and is one of the top five information technology (IT) services and consulting companies in India.

The company has a diverse range of offerings including IT and Business Services (ITBS), Engineering and R&D Services (ERS), and Products and Platforms (P&P) that caters to 250 of the Fortune 500 and 650 of the Global 2000 leading enterprises in the world.

HCL is one of the fastest growing large technology companies in India with a market capitalisation of Rs 2.6 tn.

The stock of HCL Tech is currently trading in the range of Rs 980 apiece. The ROE over the last 5 years stands at a healthy 23%.

FIIs owned 24% of the company in the fourth quarter of the fiscal year 2019-20. This has now declined to 19% in March 2022. Demand for IT remains resilient despite the knee jerk reaction of the FIIs reducing their investment in the company.

HCL Tech is on a zero debt trajectory and has maintained a healthy operating margin of 40.4% in the financial 2020-21.

The company has a solid business risk marked by its presence across diverse verticals and service lines. Liquidity is driven by cash surplus.

HCL as a company is expected to emerge stronger on the back of an expected increase in enterprise demand for these services.

For more details, check out HCL Technology's latest shareholding pattern.

#4 Astral

Established in 1996, Astral Pipes is a top manufacturer of plumbing and drainage systems in India.

During its 25 year journey, the company was the first to introduce CPVC in India and offers a comprehensive range of products including piping, water tanks and adhesive products to the Indian market.

Astral is a pioneer of plastic pipes and fittings. The company has a manufacturing presence across 12 strategic locations in India and 3 countries internationally. The total production capacity of approximately 250,000 MTPA which is supported by 33,000 dealers nationwide.

With a market capitalisation of Rs 338 bn, Astral is one of the fastest growing companies in the piping segment in India.

Over the last 5 years, Astral has logged in a CAGR of 13.8%.

Outperforming its peers, Astral share price has rallied almost 852% in the last 5 years hitting a high of Rs 2,258 in December 2021 from Rs 233.4 in December 2016. Currently, the stock is trading in the range of Rs 1,680 apiece. The ROE is a stable 21% over the last 5 years.

Astral is virtually debt free.

As of March 2022, FIIs own a 17.8% stake in the company compared to 22.7% in March 2021. In spite of this, analysts believe that the overall revival of the economy will pave the way for Astral towards a strong performance in the next 2 to 3 years.

Strengthening its balance sheet along with an uptick in real estate, higher PVC prices and market consolidation will enable Astral to continue its growth story.

For more details, check out Astral's latest shareholding pattern.

Should You Buy the Stocks FIIs are Selling?

The Indian stock market is poised at an interesting juncture. The trend is absolutely clear as to which direction the markets are progressing.

On one hand, we see relentless selling by the FIIs. On the opposite end of the spectrum, domestic retail investors and mutual funds (DIIs) are pouring their money into these very holdings.

Had the domestic inflows not turned up strongly, by now the indices would have crashed to a 52-week low.

The domestic investors are simply not intimated by this indiscriminate sell-off by the FIIs. Such aggressive behaviour at a time when stock prices are declining projects a crystal clear picture of the domestic savings deepening their hold in Indian equities.

However, when it's a question of 'should', the perspective is personalised. When you are considering investing in a company, you must follow the approach that best works for you in terms of long term wealth creation.

If you look at the four companies that have been highlighted in this article, each one comes with strong fundamentals and robust growth prospects.

They are backed by experienced promoters and seasoned management teams. Their balance sheets are healthy and each one of them has maintained reasonably steady CAGR over the last 5 years.

What this means is that you should not let the FIIs selling their investment in these companies be the only point of guidance for your investment.

If you see a substantial upside to your investment, then just go for it.

Since you're interested in tracking FII activity, check out Equitymaster's powerful Indian stock screener.

This tool keeps track of what foreign investors are buying and which stocks FIIs are selling.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...