Who made the right move - FPI or MF?
Presenting three mid caps wherein foreign investors have sold, while mutual funds have bought
By Yash Rohra | Aug 30, 2019
The Indian stock markets have been in a falling spree following the proposal to introduce extra surcharge on foreign portfolio investors (FPIs) by newly appointed finance minister, Nirmala Sitharaman. Since then, within the span of less than two months, the markets have fallen by more than six percent.
During this period, heavy selling by foreign investors to the tune of Rs 33,000 crore is believed to be partly responsible for the fall. Nevertheless, while FPIs have been high on selling, mutual funds have been in a buying mode, having bought stocks worth Rs 40,000 crore. Against this backdrop, this story delves into the mid-cap space, wherein mutual funds have raised their stake by at least two per cent, while foreign investors have reduced it by at least two per cent in the last two quarters.
All three companies belong to different sectors, have a proven track record and trade below their long-term valuations. Want to know more about them? Scroll down.
Mutual funds increased stake by 2.4 per cent.
FPI reduced stake by 3.4 per cent.
The fourth largest pharmaceutical player in India and seventh largest pharmaceutical company in the US by total prescriptions, Cadila caters to formulations (medicines), API (raw material for medicines), wellness and animal health. In FY19, it derived around 80 per cent of its revenues from the formulations business, with the US being its largest market. Its wellness segment (six per cent of revenues) enjoys strong brand recall, with Sugar free enjoying around 94 per cent market share in the sugar substitute segment.
Cadila has come under rough weather with the USFDA (United States Food and Drug Administration) issuing 14 observations on its Moraiya plant, which is also believed to be the largest contributor to its US business. This can significantly impact the company's future business if the company receives a warning letter or import alert for the facility. On the other hand, the US markets are also going through a phase of significant pricing pressure and heightened competition, thereby resulting in pressure on its profit margins.
On the other hand, Cadila's leveraged acquisition of Heinz in its wellness segment is expected to strengthen its market position. The company also has demonstrated an exceptional record of maintaining return on equity of more than 20 per cent in the last 10 years, except in 2019 when it was a tad below the threshold. On the back of this concern, its stock has fallen by around 45 per cent in the last one year and currently trades at price to earnings of 13 times against its five-year median of 26 times.
Crompton Greaves Consumer
Mutual funds increased stake by 2.1 per cent.
FPIs reduced stake by 2.2 per cent.
Backed by two private equity players, Advent International and Temasek Holdings, Crompton is a well-known player in the electrical goods space, having a leading position in fans, lighting and water pumps on the back of more than 3,000 distributors and one lakh retailers. It operates in two segments: electrical consumer durables (72 per cent of FY19 revenue) and lighting products (28 per cent of FY19 revenue). Recently, the company has entered into new segments such as coolers, water heaters, small kitchen appliances and irons.
Crompton was earlier known to cater to the lower-end of the market. However, with change in management its focus has shifted towards premiumisation since 2015, given changing consumer preferences and rising income levels. As a part of the ongoing shift, the company has increased expenditure on advertising and launched innovative products such as dust-free fans and Air 360 fan. Launch of these products have further helped it to gain additional market share. Its brand name and significant market share in fans as well as in pumps provide it with a competitive advantage over peers. Its dominant position has also translated into robust financial performance, with return on equity of more than 45 per cent in FY19.
Keeping aside the positives, one of the key concerns for the company is the presence of pledging (49 per cent). The company also derives a significant portion of its revenues from fans, lights and pumps and therefore, it is more prone to any potential slowdown or cut in discretionary consumer spending. The stock currently trades at a price to earnings of 34 times against its three-year median of 45 times.
Mutual funds increased stake by 2.2 per cent
FPIs reduced stake by 2.1 per cent
Page Industries is an exclusive licensee of Jockey (USA) in India, Sri Lanka, Bangladesh, the UAE and Nepal. Working with the brand name of Jockey, Page has created a niche for itself in the innerwear market on the back of its premium offerings. It specialises in innerwear and outerwear like jackets, socks, shorts and t-shirts. The company distributes its products in more than 1900 cities and towns, with a total reach of more than 55,000 outlets in India. It also operates 620 exclusive brand outlets in India and a total of six outlets in the UAE and Sri Lanka.
Earlier, the innerwear market was seen as a utility market for basic and day-to-day essentials. Jockey changed the perception of innerwears with its focus on premium and differentiated products. This strategy has worked, with its products attracting the youth and driving the shift from essential to premium. Foreseeing an increasing demand, the company is in the process of expanding the capacity in the men's business.
The company has come under pressure with falling volumes and lower profitability growth. Its five-year return on equity has still averaged around 50 per cent, which is a rare feat. The stock after a fall of 50 per cent in the last one year, still trades at a pricey 52 times earnings against its five-year median of 68 times.
Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.
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