FII Inflow: Can the Pace Continue

and are still tread-ing with caution. A similar trend was witnessed with sub-accounts where in 2010 only 287 new sub-accounts were registered as against 459 in 2009.FIIs, as mentioned earlier, are the major drivers in both aspects whether it is fuelling rally in the equity markets or creating volatility in the same. It has been noticed that FIIs react much faster to bad news as compared to good news. The explanation for this behaviour is that they are risk averse, which makes them react in a knee-jerk fashion to bad news. Moreover, they view every market as an asset in their global port-folio and therefore tend to restructure and rebalance their portfolio dynami-cally across countries to minimize and maintain healthy returns. Even among FIIs, it is investment through participatory notes (P-Notes) which is considered a prime source of ‘hot money’ and hence volatility. This is because there is little clarity on who the actual investors are and the source of their money. To keep tabs on this, SEBI banned investment through P-Notes on October 17, 2007, resulting in the crash of the benchmark Sensex and suspension of trading for an hour. But the latest SEBI figures suggest that supplies of this hot money are on the decline. In 2007, investment through P-Notes constituted 45.5 per cent of FIIs’ total assets under management. This has come down to just 16.75 per cent in 2010. This is on the backdrop of SEBI lifting the ban on investment through P-Notes. This drop may be attributed to the fear of the regulator imposing the ban again.FIIs Likes and DislikesWhile analyzing the trend in FII holdings on a group basis, we find that out of 193 companies in the ‘A’ group, 123 have witnessed an increase in their FII holdings in the quarter ended September 2010 as compared to the quarter ended December 2009. While in the ‘B’ group, out of 1002 compa-nies, 381 have witnessed an increase in their FII holdings in the quarter ended September 2010 as compared to the quarter ended December 2009. For Sensex stocks we find that out of 30 stocks, 18 companies have witnessed an increase in FII holdings and in the Nifty out of 50 companies, 31 have witnessed an increase in FII stake for the quarter ended September 2010 as against December 2009. FIIs may have been the major driver for the markets and stocks but the fact holds true in some cases only. In the ‘A’ group, we find that LIC Housing and IndusInd Bank have wit-nessed an incremental FII investment on a YoY basis to the tune of 8.96 per cent and 7.24 per cent respectively and the price has gone up by 81 per cent and 91 per cent YTD till 30th September 2010. But on the other side of the coin, we find that in the same group, companies like Indian Bank, Jet Airways and Petronet LNG the FIIs have decreased their stake on a YoY basis but the price on a YTD basis till 30th September 2010 has witnessed a northward journey to the tune of 58 per cent, 48 per cent and 47 per cent respectively. Sensex companies like HDFC Bank, SBI and Tata Motors have witnessed maximum gain in their prices on YTD basis end-ing September 2010 and have also witnessed increased FII investment to the tune of 2.26, 2.62 and 6.96 per cent. But there are certain companies like Infosys Technologies, Tata Steel and BHEL where FIIs have decreased their stake. Still they have been able to witness northward move to the tune of 17 per cent 6 per cent and 5 per cent respectively.
In the present story, we are looking at factors why India will continue to receive fresh money.

FIIs don’t wish to miss the India growth story

India as we know is one of the most prominent emerging economies of the world. The “India Growth Story” these three words were enough to attract investors to India. In the recently con-cluded third quarter, the domestically-powered economy grew more than expected in the September quarter, defying weakness elsewhere and put-ting pressure on the Reserve Bank of India (RBI) to tighten monetary policy although a rate increase next month still looks unlikely. Annual gross domestic product grew 8.9 percent in the September quarter -- matching the revised figure for the previous quarter. One fact that gets clearer from this data is that the India story is still on and in spite of facing some hindrances or set back in form of IIP numbers which hit a low of 5.6 per cent in August 2010 but has been able to get back on track with a 10 per cent growth for the month of October 2010. Therefore, when an economy is showing signs of growing then it is most likely that it is going to attract more FIIs to the Indian markets. No FIIS wish to miss India’s growth story.[PAGE BREAK]
One fact that is worth mentioning here is that India’s share of world GDP, according to the World Bank’s Development Indicators rose to 2.3 per cent at the end of 2009 which has improved from 1.60 per cent in 1999 while the share of the US has decreased to 24.3 per cent in 2010 from 29.8 per cent in 1999. A higher share in GDP means higher attention for India from the world’s fund manager. Vaibhav Sanghavi, Director – Equities of Ambit Capital feels that, “Domestic consumption is on an upswing and is likely to support the growth numbers, unlike other economies which primar-ily depend on exports.” This view reinforces that the GDP of the country should do well.

Earnings

We are at the fag end of the third quarter of the present fiscal and with the start of January, the results will start flowing in. But we can get an idea of the earnings as we get to have a look at the advance tax numbers. The figures of the advance tax for top 100 corporates of the Indian Inc have wit-nessed 18.7 per cent growth on a YoY basis. From the advance tax figures we can expect that we are going to witness better performance for the India Inc. going forward. The better earnings are likely to attract more investors who see India as an attractive destination. Therefore, we may assume that the FIIs will most likely to buy the India growth story and look forward to India in the coming year of 2011.

PSUs‘ divestment would attract FIIs

In the year 2010, a record amount of money was raised thanks to the rush of IPOs and FPOs that have hit the equity market. We saw 70 public issues, that is 62 IPOs and 8 FPOs. The funds raised through public issues totaled about Rs 71,114 crore. FIIs actively par-ticipated in the same. In fact, total investments by FIIs in the primary market stands at Rs 38,842 crore. A major chunk of the amount raised through share sales -- that is, Rs 49,946 crore -- came from the government divesting its stake in public sector com-panies. Indian firms raised a total of Rs 2,00,123 crore during 2010 through equity issues -- in the form of Initial Public Offers (IPO), Follow-on Public Offers (FPO), Qualified Institutional Placement (QIP), rights issues and foreign depository receipts like glob-al depository receipts (GDRs) -- as well as debt instruments like External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs). In the public offer segment, 2010 saw a clear revival in the Indian primary market after a lacklustre 2009, when only 20 companies raised close to Rs 20,000 crore.
In the year 2011, the same trend is likely to continue as we will see PSUs like IOC, ONGC and Hindustan Copper hitting the markets, expecting to attract further FII interest in the early part of the year. According to Aneesh Srivastava - Chief Investment Officer with IDBI Federal Life Insurance, “The need of capital for the growth of the economy is huge and hence it will not be surprising if we see similar activity in the coming year where money is being raised by India Inc.” Higher divestment from the government would mean more FIIs coming to India.[PAGE BREAK]

Valuation

At the start of the year 2010, the Sensex was trading at a P/E multiple of 21.82 times and today standing at the fag end of the current calendar year we are trading at a P/E multiple of 22.83 times. In other words, we have not seen much change in the P/E level. This makes us believe that FIIs are comfort-able investing at higher valuations. But the key is that India Inc should con-tinue to report better earnings to justify the valuations otherwise FIIs would start selling on the bourses.
The highest ever P/E multiple that the Sensex have received is of 26 times. It is very clear from the fact that the markets on the valuation front remain almost unchanged. But as we move to the year 2011 there is lot of optimism in the investor’s mind and it is backed by the fact that leading brokers from the industry expect the market to close the next year on a new high. As we all know India is a country that is driven by domestic consumption and it has been able to take the blow of the financial crisis and was able to come out of the same. India is a growing economy and its growth story is still intact which may act as a premium as compared to other emerging markets. We feel that despite trading a bit higher as compared to other emerging markets, India is likely to attract FII investment. According to Aneesh Srivastava - Chief Investment Officer with IDBI Federal Life Insurance, “Consumption and investment led growth will keep driving countries like India.”
To conclude, the world recognizes that India will provide the growth impetus for the global economy with its favourable demographic dividend which will last longer than many emerging economies, its political sys-tem and new vigour in Indian Inc. to take on the challenges of global competition. Therefore, we believe that FIIs will continue to look at India as an investment destination to park their funds, although the pace of flow may reduce.