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Games MFs, FIIs Play

Mutual funds and foreign institutional investors have been at odds and ends regarding their market calls

Despite the severe pressure from the global meltdown, and thanks to a highly volatile market, large market players took huge bets and quickly retreated as and when they saw fit. Understandably, some companies’ stocks became favourites while others were shunned. Quriously, there emerged a group of stocks that were mostly bought by mutual funds (MFs) and mostly sold by foreign institutional investors (FIIs).

When both MFs and FIIs move in opposite directions the market situation cannot be termed ‘normal’. The repercussions on the markets were huge, with over Rs 48,000 crore redemptions in 2008-09, FIIs had been net sellers across all four quarters. But MFs put in Rs 6,630 crore and turned net sellers in just the fourth quarter when they withdrew Rs 642 crore. During this period Sensex fell from 15,644 points to 9,708 points. The situation was tailor-made for bargain hunting and MFs cached in.

In 2009, the trend is shifting the other way round as FIIs have pitched in some Rs 31,000 crore in equities, as on June 25 — MFs, on the other hand, have invested some Rs 3,237 crores.

Here are the companies, and their strong/weak points that made MFs buy into them and FIIs sell-off.

Bharti Airtel
India’s biggest mobile operator, Bharti Airtel, increased its profits by 26 per cent year-on-year (y-o-y) in FY09. Its mobile services had contributed to 82 per cent of the revenue and 64 per cent to its net profits. But the margins fell from 41.77 per cent (FY08) to 38.61 per cent in FY09. The takeover of MTN has the potential to lower costs and bring revenue synergies for both while propelling the combined entity the to the third spot among telecom service providers.

CESC
The company, which is a part of the RPG Group, has been improving its operating efficiency and has emerged as a competitive electric utility. It’s in an expansion mode. The current capacity addition projects of the company are close to Rs 5,200 crore, to be spent by FY13. Profits increased 14 per cent y-o-y in FY09. However, the recent merger of retail business (Spencer’s Retail) with the power business has proved to be a drag on performance.

Cipla
This large-cap pharma company has been able to increase its revenues and profits in Q4FY09. As if that was not enough, sales too have jumped 21.8 per cent y-o-y to Rs 1,370 crore. At the same time, profits increased to Rs 250 crore in Q4FY09, an increase of 40.9 per cent y-o-y. Also, domestic revenues are likely to remain robust, but there is a possibility of threat to exports if it fails to rectify the deviations pointed by out by the US FDA in its manufacturing processes.

Gujarat Gas
It is the largest private player in natural gas transmission and distribution business. The British Gas-controlled (65.12% stake) company’s sales fell about 7 per cent in the last quarter due to gas shortages. This caused a dip in profits. However, going ahead with its plans and better availability of domestic gas from Reliance Industries’ KG basin and Petronet LNG expansion, worries are expected to soften on the supply side. Being a zero debt company, the interest costs are negligible.

Hindustan Zinc
This Vedanta Group company reported a 28 per cent decline in annual sales and 38 per cent decline in net profits for FY09 y-o-y. In India the industry is dominated by Hindustan Zinc (HZ) and Binani Zinc, with HZ controlling some 60 per cent of the market. Demand for zinc is expected to be strong due to the growth of zinc-consuming sectors like infrastructure, realty and manufacturing.

Karnataka Bank
FIIs hold 39.77 per cent of its total equity shares. The bank plans to raise Rs 500 crore through qualified institutional placements (QIP). Profit for Q4FY09 grew 37 per cent y-o-y while the loan book grew 9 per cent in FY09. The bank has moderated its growth in an uncertain environment.

Shree Cement
The company reported 28.73 per cent increase in net sales y-o-y and 122 per cent jump in net profits in FY09. In the fiscal 2009, profits from the sale of power generated from its captive plants contributed 39 per cent to its operating profits as compared to 24 per cent in FY08. Power generation is definitely the thrust area of the company and has increased capital employed in the segment and plans to further increase it in this fiscal. 

Plucking & Shedding
    Holdings (MFs) (%)  Holdings (FIIs)  PAT      
Company  Industry  Mar-09  Mar-08  Mar-09  Mar-08  (Rs Cr)  Price  PE  PB
Bharti Airtel Telecom.Services 3.07 2.14 20.72 24.99 7743.85 802.1 19.66 5.51
CESC Electricity Generation 12.5 8.4 19.26 23.79 410 276 8.41 1.02
Cipla Drugs & Pharma 4.54 1.34 13.4 18.33 767.83 253.3 25.64 4.36
Gujarat Gas Co. Storage & Distribn. 6.6 3.9 14.13 15.97 150.03 297.35 12.71 2.65
Hindustan Zinc Other Non-Ferrous Metal 1.45 0.67 1.42 2.38 2727.61 601.15 9.78 1.76
Karnataka Bank Banking 3.31 2.57 32.96 39.77 266.7 139.9 6.38 1.03
Shree Cement Cement 9.43 6.48 3.32 7.66 577.97 1184.5 6.78 3.35
Data as on 30 June, 2009
Among the BSE 500 stocks, we filtered out those companies in which MFs had increased their stake continuously for the past 4 quarters;
Then we filtered out those companies that FIIs had sold continuously during the same period;
Finally, we were left with these seven companies.

The article appeared in the July issue of Wealth Insight magazine