By Deeksha Janiani
Foreign investors have come back to India in droves in the first quarter of this fiscal year, injecting over Rs 96,000 crore into the Indian equities market. This is the highest-ever quarterly investment since the October-December period in 2020. In contrast, domestic mutual funds have shown caution, refraining from significant commitments to the Indian stock market.
Foreign investments hit a 10-quarter high in Q1FY24
Many factors worked to India’s advantage at the start of FY24: healthy economic growth, political stability, higher public capex, moderate market valuations and a peaking interest rate cycle. The underperformance of the Chinese economy and its equities market also favoured India’s position.
Commenting on the performance of Chinese markets, a partner at an American investment management firm said, “The reopening trade was wildly enthusiastic in January, but since then it has totally turned around.” Chinese and Hong Kong-based indices generated the worst returns among other Asian benchmarks in Q1, while India stood as the second-best performer.
India shines among top Asian markets in Q1FY24
China is stuck in a vicious cycle of price deflation, low growth, high unemployment, falling exports and a depressed housing market. Investors have stayed away, and foreign direct investment in China fell by nearly 6% in dollar terms for the first five months of 2023.
Investors have instead shifted their focus to other Asian nations like India, Taiwan, Japan and South Korea. According to the head of research at BNP Paribas for Asia, the two dominant themes for the region this year are ‘buy India’ and ‘buy AI-driven tech’.
As hot foreign money chased Indian markets in Q1, we take a look at the sectoral preferences and key stock bets of the top eight foreign institutional investors (FIIs). We will also explore sectors that saw some selling activity during this period.
Govt of Singapore is the biggest FII for India in terms of public net worth
Banking and finance sector becomes popular among FIIs
The top eight foreign investors picked up fresh stock positions across different sectors, but the financial space stood out as a popular choice. It constituted over 45% of the total value of new positions taken by these investors in Q1.
Banking and finance emerges as a clear favourite of FIIs in Q1
Non-food credit in India has been growing in double-digits, driven by loans in the services and retail sectors. Accordingly, banks and NBFCs are seeing robust growth in their loan books, leading to higher net interest incomes and profits. Improved asset quality has also reinforced investor confidence in this space.
During this period, the Government of Singapore bought fresh stakes in Kotak Mahindra Bank and Shriram Finance. Additionally, it increased its stake in HDFC Life Insurance. Government Pension Fund bought new positions in SBI Cards, CMS Info Systems and Home First Finance.
Top two FIIs take new positions across banking, auto and pharma sectors
FIIs also raised their stakes in players offering other financial services like credit rating and broking. Vanguard Fund added a 0.2% stake in Care Ratings, while Smallcap World Fund bought a 0.7% stake in Angel One, taking its holdings to 3.5% by the end of the June quarter.
The pharmaceuticals and auto sectors also saw heightened foreign investor interest. Indian pharma players saw improvements in their Q1 performance, especially in the US generics market. Pricing pressures also stabilised, owing to tighter supplies.
Smallcap World Fund bought new positions in midcap stocks like Laurus Labs and Glenmark Pharma. Govt. Pension Fund also made a fresh buy in Glenmark. These stocks were quoted at throwaway valuations at the start of April.
Smallcap World buys stakes in pharma cos, Vanguard buys new-age startups
Top FIIs pick up stakes in auto and auto component stocks
The auto sector saw significant buying activity in Q1. The Government of Singapore picked up a fresh stake in Apollo Tyres, while Government Pension Fund made a new bet on 2W maker Bajaj Auto. Top FIIs also raised their existing holdings in auto and auto ancillary companies like Mahindra & Mahindra, Eicher Motors, Ashok Leyland and Sona BLW Precision.
FIIs add to their existing positions in auto and auto components sector
Auto makers saw healthy growth in their Q1 domestic wholesales, especially in the two-wheeler and passenger vehicle categories. Two-wheeler major Bajaj Auto saw over 70% YoY jump in its 2W wholesales. This was aided by the low base of the previous year. Among PV makers, Mahindra and Maruti saw notable upticks in their utility vehicle wholesales in Q1.
The outlook remains bright for this sector due to multiple drivers like robust demand for SUVs & premium motorcycles, lower commodity costs and better semiconductor availability.
A special mention: FIIs also show interest in industrials and cement stocks
The Government of Singapore made a fresh investment in the defence major, Hindustan Aeronautics, during Q1FY24. Although the remaining seven major FIIs did not make significant investments in capital goods and cement stocks, the case is quite different when we look at the overall number.
Cumulatively, foreign investors added over 2% stake in companies like Timken India, MTAR Technologies and Triveni Turbine during the June quarter. They also picked up over 1% stake in large caps like UltraTech Cement, Ambuja Cements and ABB India.
The Centre is accelerating its capex spends ahead of the 2024 general elections. It has also been able to attract private investments in sectors like steel, cement, telecom, renewable energy and autos. Project announcements have also revived strongly in the past two quarters. These trends bode well for cement and capital goods makers in India.
FIIs trim holdings in chemicals space
The top eight FIIs pared their holdings in various stocks across the once hot chemicals & petrochemicals sector. Government Pension Fund reduced its stake in stocks like Deepak Fertilizers, Archean Chemical and UPL. Similarly, Smallcap World Fund sold a 1.5% stake in Navin Fluorine, while the Government of Singapore reduced its stake by 0.5% in Dhanuka Agritech.
FIIs cut stakes across agrochemical and commodity chemical stocks
Chemical companies have been going through a rough patch lately due to weak demand in export markets like the US, Europe and Latin America. Additionally, prices of key products have corrected due to higher supplies from China.
The Government of Singapore also reduced its holdings in oil & gas sector stocks like Hindustan Petroleum and Petronet LNG. This top FII and Vanguard Fund sold a minor stake in IT major Infosys. Meanwhile, Smallcap World Fund reduced its stake by 0.4% in mid-tier player Coforge.
Are Indian equity markets still attractive?
Foreign institutional investors continued their buying spree in July as well. Although they are net buyers overall in August, FIIs have begun selling Indian equities over the past two weeks, possibly due to the higher valuations of Indian markets and higher inflation numbers. It is also likely that FIIs are booking some profits now.
According to ICICI Securities, the Nifty 50 index is trading at a 12-month forward PE of 19.4X, which is around 15% higher than its long-term average. The brokerage also believes that small and mid-cap stocks are trading in an unattractive valuation zone.
In a blow to China, the US has imposed restrictions on certain investments in China starting next year. The banned categories are quantum computing, advanced chips and artificial intelligence. This could definitely be an advantage for other Asian nations.
India is a force to be reckoned with in the present day. A head of research at Julius Baer recently said, “We view Indian and US equities as long-term investments and Chinese equities as a trade.” While valuations could temporarily stall the buying spree for FIIs, India will continue to pique foreign investment interest over the next decade.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.