Foreign institutional investors (FIIs), net buyers of over Rs 2.67 lakh crore this fiscal, have consistently raised stakes in 41 companies valued at over Rs 1,000 crore, helping their shares rise 100%-1,000% in the first three quarters of FY21, data from AceEquity shows.
These include Mahindra & Mahindra, Adani Green, Bajaj Electricals, Dixon Technologies, Aarti Drugs, Deepak Nitrite, Elgi Equipment, Motherson Sumi, LT Foods and Affle India, among others.
Market experts said FIIs used the volatility in the beginning of the fiscal year to raise stakes in companies that would gain from the pandemic, and in good firms that were attractively valued.
“Some of the stocks in the list were a well-established business with strong fundamentals in which FIIs have always maintained a decent stake and took the advantage of the market correction to further hike their stakes (for example companies in the BFSI and chemical space),” Nilesh Shah, CMD, Atlas Integrated Finance Ltd told Moneycontrol.
“Some of the companies were from sectors which had become the need of the hour during the pandemic scenario like IT, Pharma, telecom etc. However, many of the stocks were companies which have cyclical businesses, attractive valuations and showed promise of outperformance once the economy reopened,” he said.
FIIs chasing growth:
The data suggests FIIs were chasing growth and chose mostly small and midcap firms, which rallied more than the bigger ones.
Both Sensex, and Nifty50 rallied over 70 percent each while the S&P BSE Midcap doubled and the Smallcap index rose more than 120 percent.
Analysts expect the trend to continue.
“Looking at the present domestic situation, the momentum is likely to continue for the next one to two quarters, but it might not be as aggressive as it was previously, as markets around the world trading in the range-bound,” Gaurav garg, head of research at CapitalVia Global Research, told Moneycontrol.
Small- and mid-caps have been attractive in terms of relative valuation. With the economy showing signs of a turnaround along with cheaper liquidity, the broader market space will remain in focus in FY22 as well, experts say.
“The business and financial prospects of many mid and small caps are set to improve due to various factors. These include the availability of cheaper liquidity and credit and the targeted repos instituted by the central bank. The China-substitution factor also may help some of them,” Parag Morey, Head of Sales, Emkay Wealth Management told Moneycontrol.
“The Nifty Mid Cap 100 and Nifty Small Cap 100 have significantly underperformed Nifty in the last three years. Almost two-thirds of the mid-cap stocks are still relatively undervalued and trading closer to their historical averages,” he said.
Morey said earnings of small & midcap companies had a strong positive correlation with economic growth. These factors make the mid- and small-cap segments look more attractive.
How to pick stocks:
FII interest in a stock can be one of the factors for an investor to buy or sell a stock, but there are other parameters that should be evaluated before making an investment decision.
“The stock market crash in March 2020 due to COVID, provided the perfect opportunity to all types of investors,” Jitendra Upadhyay Sr. Equity Research Analyst at Bonanza Portfolio.
“FIIs have evaluated on the basis of business potential, quality of management, financial strength, growth-seeking stocks, a good number of small-cap companies are ready to move to the next level of growth,” he said.
Shah of Atlas Integrated Finance Ltd told Moneycontrol his company focused on two aspects: Business strength in terms of the company’s market share, its edge over competitors in terms of superior margin and return ratios during all business cycles. Second, management quality evaluation which involves checking promoter background, related party transactions, etc.
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