Foreign Investors Take a Fancy to Listed Firms Going Cheap

In the last 4 quarters, FIIs have raised stakes in at least 10 cos that have seen a big value erosion 

    Foreign institutional investors (FIIs) have steadily raised their stake over the last four quarters in several listed companies, the stock values of which have eroded considerably during this period. 
The shareholding pattern data for the period ended June 30 shows that among the several listed companies where FIIs have steadily raised stake in the last four quarters, there are at least 10 that have lost massive value. In MCX, for example, FIIs raised their stake from 8.8% a year ago to 18.2%. Yet the stock is down 51% from a year ago. In Wockhardt as well as Muthoot Finance, foreign funds nearly doubled their holdings over the last one year to around 10.4%, but these stocks have lost 55% and 44%, respectively. Most of these companies are trading near their 52-week or all-time lows.
“Last year, the widely-held view of a prolonged period of easy monetary policy ahead, both globally and locally, attracted investor interest in cyclicals, which has turned sour now,” says Vikram Dhawan, director, Equentis Capital — a UK-based investment analytic and advisory firm. Dhawan says that anecdotal evidence suggests that FIIs tend to favour relative performers in all sectors.
However, what is puzzling is the fact that some foreign porfolio investors are actually raising their stake in companies for whom the going has been tough. These include companies such as Gitanjali Gems and Wockhardt whose stocks have hit the lower circuit in the last few days besides Muthoot Finance, Sintex Industries, MCX, CARE and BGR Energy — all of whom reported new lows. All these stocks are now down between 50% and 90% from their peak valuation in the last one year. From the perspective of some of these foreign funds, it could also be a contrarian view on troubled companies as they may be betting on a turnaround to earn high returns. For instance, the holding of FIIs in GTL Infra has risen from just 0.5% last June to 12.65% at the end of June. A single fund, US-based Elm Parks Fund, picked up a 7.8% stake in it during the June 2013 quarter, in line with its objective to invest in out-of-favour companies. The debt-laden telecom tower infrastructure company is finding it tough to stay in the black.
Similarly, in the case of JP Associates, FIIs may be building their stakes on hopes of a reversal of the interest rate cycle to boost its fortunes. Daljeet Kohli, head of research, IndiaNivesh Securities, points out that long-gestation infrastructure projects need upfront investments, which justifies their high debt. “The company has assets in the form of a land bank and cement plant, which it can sell off to retire a meaningful portion of its debt,” he says. Extreme low valuations could also be a reason for bargain hunting by these funds.
“Some of these companies have been beaten down on the markets beyond what they deserve fundamentally,” says G. Chokkalingam, Chief Investment Officer, Centrum Wealth Management. Wockhardt is trading just 2.2 times its book value compared to 14.4 times a year ago, while the P/BV ratio has halved for other firms during the same period.
According to Vikram Dhawan of Equentis panic or disillusionment could result in further liquidation of some of these stocks. Centrum’s Chokkalingam concurs. According to him, a couple of stocks in the list may finally go belly up, but stocks such as MCX and Wockhardt have relatively strong balance sheets. “One shouldn’t form conviction based on FIIs’ buying behaviour,” he says.