Bullish on consumption

A comparison of foreign portfolio investor (FPI) and mutual fund portfolios can yield some interesting insights into the differences in their thought processes. FPIs have sold Rs 32 billion in calendar 2018, while domestic institutional investors (not just funds) have bought Rs 665 billion. The data reveals obvious differences in attitude. There are more subtle differences in approach, too. 

Fund research house Value Research has some details of aggregated portfolios at end-June. When it comes to the top ten holdings, the differences are mostly just a matter of rank and there's not much that one can deduce from the picks. The common top ten stocks for both sets of investors are HDFC Bank, ICICI Bank, Infosys, ITC, Reliance Industries, HDFC, Maruti and Kotak Mahindra Bank. 

Domestic institutions hold Larsen & Toubro and SBI in their top ten, while FPIs hold Axis Bank and TCS instead. There are restrictions on FPI positions in closely-held government banks. The other three stocks are widely held by both domestic and overseas investors, and those three feature in the top 20 holdings for both sets of investors.

When we look at increases or decreases in stakes and at relatively smaller stocks, some of the attitude differences between the two sets of investors become clearer. In Q1, 2018-19,  FPIs increased their stakes in Bandhan Bank, Indiabulls Ventures, Interglobe, ICICI Pru and Adani Port in June 2018, compared to March 2018. That's a combination of civil aviation, cargo transport and logistics, and a broad exposure to financial services, including banking, insurance and trading.  

Among large caps, domestic funds have increased their stakes in Tata Steel, Dr Reddy’s, BPCL, ACC and Colgate. That's a focus on the real economy for domestic funds. More specifically, it's a look at the core sector, given greater exposures in steel, cement and refineries. DRL is an export play while Colgate is an FMCG. 

Drilling down further, FPIs have increased stakes in midcaps such as Future Lifestyle, Fortis, Mphasis, Godrej Properties, and Lakshmi Machine Works. That list includes exposures to retailing, healthcare, IT, real estate and textiles. Meanwhile, domestic funds have increased their positions in Nalco, Bharat Financial Inclusion, RBL Bank, PVR and Vardhman.  That's non-ferrous metals, financial services, textiles and media. 

In the small-cap space, FPIs have increased holdings in Indiabulls Integrated Services (formerly SORIL Holdings), Aarey Drugs, Indostar Capital Finance, Gokaldas Exports, and DFM Foods. Indiabulls offers financial services, Aarey makes APIs for drugs, Gokaldas is into high-end apparel for exports, and Indostar Capital is an NBFC with both retail and corporate exposure.  

Domestic funds have also increased their exposure to Indostar Capital.  The other small-caps in which DIIs increased their exposure included Magma Fincorp, Ganesha Ecosphere, Fine Organic Industries and Strides Pharma.

This snapshot indicates that domestic funds are more focussed on the real economy, while FPIs are more prepared to take exposures to the financial sector. There's a hint that domestic funds may be prepared to take greater exposures in the core sector, which FPIs are not so interested in. 

Both sets of investors are betting fairly heavily on domestic household consumption. Even the financial sector exposures by both sets of investors are geared at businesses that service retail clientele. There is a sense that consumption may bounce back. This is backed up by Q1 results. 

Textiles is a broad focus area. This is interesting because the industry has been in the doldrums. Import tariffs came after June (when these portfolios were declared). But “good intelligence” could have meant investors had an inkling about tariff hikes. It's no secret that the textile industry has been lobbying for this. A weaker rupee may also boost exports though competitors such as Bangladesh and Vietnam have also seen currency weakness. 

Pharma is an export-related theme and a turnaround play. There is a sense that Indian pharma has learnt to cope with strict inspections from the US Food & Drugs Administration. The weaker rupee also helps. 

Fortis Healthcare may have been a news-based trade gambling on a buyout. The other picks are all growth oriented. The FPIs have cut down India exposure, but they haven't gone defensive. The funds will keep buying so long as inflows continue.

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