Stocks
Experts peddle myths and misconceptions to downplay fears of FIIs pulling out

Ask a question about how much the Indian market is dependent on FII investment and fund managers will flood you with myths and wishful thinking

Indian markets almost hit their all-time high in October, primarily led by the copious inflows from foreign institutional investors (FIIs). FII investment has already crossed $21 billion in 2010. However, this begs the question, if we are so dependent on the kindness of foreigners for our bull market, what happens when they start selling? To discuss this, Indian Merchants' Chamber of Commerce recently organised a discussion, in which Sanjay Sinha, CEO, L&T Mutual Fund, participated.

Commenting on this phenomenal rise in stock markets, Mr Sinha said, "The ongoing interest in equities is shown by strong inflow in the general emerging markets (GEM) which has been more than $40 billion, rising equity weights in GEM pension fund assets, heavy IPO activity and secondary issuance."

But aren't these factors clear signals of an overheated market? The flurry of IPOs, for instance, is a telltale sign of a market that has reached a kind of euphoria. Mr Sinha cited the example of the Korean stock market, which continued its upward surge despite FIIs pulling out funds from the market.

"Despite outflow of funds by FIIs from the Kospi Index, the Korean stock market was surging due to high participation from retail, mutual fund, insurance schemes and pension funds. So even if FIIs withdraw their funds from the Indian stock market, it should not plunge and retailers should show massive interest in the surging economic market."

Mr Sinha's facts may be correct but are quite irrelevant. Indeed, the facts in India are exactly the opposite. Where are the retail investors, mutual funds, insurance companies and pension funds in India? Here are some facts that Mr Sinha knows better than us but prefers to put out a different point of view to the public. Thanks to a slew of regulatory changes in the financial services industry, the number of retail investors is dwindling rapidly. Mutual funds have witnessed a massive hemorrhage of funds ever since the Securities and Exchange Board of India (SEBI) abolished the entry load in August last year.

September 2010 saw equity fund outflows touching a level as high as Rs7,100 crore, taking the outflow to Rs21,000 crore over the last 14 months. Similarly, revised Unit-linked Insurance Plan (ULIP) regulations have hurt the life insurance industry, whose ULIP sales accounted for 80% of the total. Pension funds do not even participate in the Indian equity markets in any meaningful manner. The Indian situation is exactly the opposite of that in Korea.

Mr Sinha had another piece of logic as to why the market will not fall with FII selling that completely contradicted the facts. He said that FIIs are unlikely to sell since it would erode the value of their investments! If that was true, markets would fall because all equity markets in the world are substantially dominated by institutions. The fact is, and Mr Sinha knows it very well, institutions move in herds. They buy in herds and sell in herds because of two reasons. One, institutional investors do not work in isolation. They are keen to know what their peers are buying and selling and even try to follow each other. FIIs are more interested in the short-term actions of their fellow investors than the long-term returns of their holding. Those who have increased their investment heavily recently are especially nervous of a decline. A temporary but large looming global or local crisis can send stocks skidding. Didn't the Sensex drop by 5,000 points in the April-May period on FIIs worrying about what is happening in Greece of all places? Two, when the market declines quite a bit, investors tend to withdraw their money and a serial redemption will force FIIs to sell together even if they don't want to. In that case, they have no choice. Mr Sinha surely knows such a thing as selling caused by redemption pressure.

If Mr Sinha, an ace fund manager, peddled lots of misconceptions and myths about the institutional investors, another top fund manager, Sunil Singhania of Reliance Mutual fund, was not far behind. He argued that India is expected to be the third largest economy in the world. He feels that BRIC countries will double in size in 5-10 years from $8 trillion economy to $16 trillion while by that time the US economy will struggle. Hence he firmly believes that money will shift from developed economies to emerging ones. Even if you don't dispute these figures, beware of drawing any market-linked conclusions from it. It is classical fallacy to assume that economic growth and stock market movement are anything but loosely correlated. Ask yourself why does the fastest growing economy in the world not have the fastest-rising stock market? Shanghai is not among the best performing markets of the past 20 years.

Argues Mr Sinha, "Global economies especially developed economies like the US and the eurozone are giving mixed signals and pointing towards a prolonged period of benign growth which will keep the central bankers inclined towards maintaining (a) loose monetary policy stance." Well, this is the actual truth. A low interest rate regime in the West and Japan is what is giving an unusual lift to stocks in emerging markets, as also commodities. The bulk of FII money is chasing Indian stocks because of lack of alternatives and not because of the great long-term story of India. Watch out for a change in the interest rate situation in the West; a lot of money would return home and a small bout of selling by FIIs is all that is needed to bring the market down. The same fund managers who are saying FII selling doesn't matter or won't happen may be the first ones to sell.
 

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COMMENTS

Vikram M

7 years ago

The author of this article has not seen mathematical analyses that prove that there is negligible connection between FII money and sensex.

G R Chari

7 years ago

A good expose on the mistaken notions of senior fund managers. No wonder most of the MF schemes are underperforming the market. The emerging markets have been hijacked by fickle-minded foreign fund managers looking for short term gains.

RNandakumar

7 years ago

Thank you for a very frank and consumer oriented article. Wise people learn form others mistakes. fools from their own. You have done your duty of creating an awarness. Now it is left to the investor.

Jayesh Pattani

7 years ago

Mr Sinha and Mr Singhania You both are most famous ans respectable name in Industry, But, if your management permit and your marketing persons agree to grow your funds steadily and staying at growth advice them to plan marketing activity with a view of IFAs not corporate distributors and bank distributors, because only IFAs is first face of any Institutions to investor if they will become powerful with knowledge they will help to break redemptions pressure to you, empower your "FIRST FACES" with depth knowledge not with TRIPS

Rambabu Shastri

7 years ago

Inflation will bring this Govt down mid of next year. The next wave of quantitative easing by the US will impact commodities world wide. All that money will flow there, creating massive problems for Emerging Economies. I sometimes feel that Quantitative Easing is being used as a weapon to tame China, but is affecting countries who are not curbing these capital flows.

Ripon Malhotra

7 years ago

I fully agree with the authors that India and Korea are different and cannot be compared.

I also pity speakers like Mr. Sanjay Sinha, CEO, L&T Mutual Fund, and Mr. Sunil Singhania of Reliance Mutual fund, who in order to save their jobs and earn bonuses, try fooling the gullible Retail / small investors to invest even in such conditions, while they themselves are the first one to sell even at the sight of a Mirage of FII selling.

The India consumption story, GDP and so on is nothing but an illusion, without FII participation. The rise in market / current rally is on the strength of borrowed legs of FII’s and shall collapse like house of cards on their selling.

The Retail investors have already lost heavily, in the last melt down and shall do a favour to themselves, by not listening to these so-called experts. Better sell and, take home some profit today, and not be greedy to lose when the music stops, by the time when these experts would have already sold their investments.

Ripon Malhotra
FCA., LL.B.
ripon9@gmail.com

REPLY

RNandakumar

In Reply to Ripon Malhotra 7 years ago

Your words are quite prophetic. Now after three months I am able to see the analyts in TV declaring that FII are nopw leaving Asia to develped markets to seek greener pastures. Central Govt's administrative abilities could be another factor of the present market behaviour. I pray for the failure of this Govt througha cut motion in the budget session.

ROOPSINGH

In Reply to Ripon Malhotra 7 years ago

I fuly agree to your conclusion-The Fund managers have always 2 faces-their front face always speaks about bullishness because then only people will come to invest and earn their AMC expanses-none of fund manager has never warned investors to book profits in worst scenario-never in history-so this ROSY picture is not new-

Bimal R Bhatt

7 years ago

What is the objective of capitalisation? Earnings only. So simply demand -supply principle will apply and see the Indian stock markets-down only. Also where is the real education for retail investor?

Rajesh

7 years ago

Well written.
Yes, where are the retailers?
Are they caught in some other bubble of real estate ?

Earnings Analysis: Sesa Goa, HDFC Bank

Sesa lowers volume estimates; HDFC Bank retail loan growth very strong

SESA GOA Q2

Net sales: Rs9.07 billion (expected range Rs6 billion-Rs10.2 billion)
Net profit: Rs3.88 billion (expected range Rs2.6 billion-Rs4.8 billion)

Highlights:

  •  Realisations at $76/tonne were much lower than market expectations; CLSA has predicted a drop in global iron ore prices by the end of the year based on higher supplies from India after monsoons and more supplies coming in from Brazil and Australia.
  •  Volume growth was in line with expectations. However, Sesa lowered FY2011E volume growth guidance to 10% from 20% because of the ban on iron ore exports by the Karnataka government and logistics constraints for iron ore shipments in Orissa and Goa. Karnataka made up 20% of volumes in FY10.
  •  What came across in its conference call after earnings is that its plan to expand production capacity to 50 million tonnes (MT) by the end of FY13 may not happen chiefly because of delays in getting environment clearance. The expansion of its Orissa mine may also be delayed. Many brokerages will probably lower their estimates. 
  •  The general consensus conclusion about its Cairn acquisition is that it was not in the value zone and took away from its main business - most fair values for Cairn range between Rs280 and Rs340 but Sesa has paid Rs355/share (if its open offer is not fully subscribed it will have to acquire the rest of the shares from Vedanta at Rs405/share). However, the acquisition is likely to add to its EPS for FY12 and FY13 by more than 10% and 20% respectively.

Conference call highlights:

  •  Iron ore production cost (including royalties) was $90-95/tonne for the Orissa mine and $40/tonne for the Karnataka mine.
  •  Sesa reversed the provision it had created in Q1 for taxes since it now believes its profits could be lower than it initially estimated for FY11. It believes that its tax rate for the year could be 15%-16% vs. 18% earlier. Its EOU benefits expire in this financial year after which it will have to pay full tax.
  •  It has environment clearance for mining for 25MT (17MT in Goa, 6MT in Karnataka, additional 2MT in Orissa).
  • Its capital expenditure in FY11 will be Rs14 billion of which it will spend Rs12 billion for pig iron and mine capacity expansion.
  •  Its cash and cash equivalent at the end of September were Rs76 billion.

HDFC BANK

NII: Rs25.26 billion (expected range Rs24.59 billion-Rs25.55 billion)
Net profit: Rs9.11 billion (expected range Rs8.98 billion-Rs9.61 billion)



Highlights:

  •  Both net profit and NII were at the higher end of expectations; loan growth at 38% y-o-y was also on the higher end of the range due to some short-term wholesale loans; core loan growth was at 33%. 
  •  Pace of NPLs is coming off and this will mean lower loan loss provisions cushioning impact of possible lower fee income growth in the future.
  •  Corporate loan book grew faster than the retail book at 46% y-o-y (9% q-o-q); retail was up 31% y-o-y (8% q-o-q) but makes up for 52% of the total book. Among retail loans, auto loans were up 36% y-o-y at Rs232 billion; retail loan growth is high considering HDFC Bank did not buy any loans from HDFC in the quarter.
  •  CASA, which had dipped in Q1, was back to 50% plus levels; HDFC Bank's deposit growth remains above industry average at 30% y-o-y.
  •  As expected, cost of funds increased and led to a marginal fall in NIMs to 4.2%.
  •  Fee income declined q-o-q and it made a treasury loss of Rs0.5 billion against a profit of Rs1.6 billion in Q2FY10; fee income growth continues to lag credit growth.
  • Staff expenses have risen sharply leading to a rise in operating expenses. 
  •  It opened 40 branches and 328 ATMs in Q2 taking its total branch network to 1,765 and ATMs to 4,721. 

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

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COMMENTS

Shibaji Dash

7 years ago

Anil Agarwal's Cairn gamble has pushed his entire stable to the realm of predictive astrology, at least for the time being, say until the endof FY 10-11.

Earnings analysis: L&T, HDFC

L&T execution picks up; HDFC disbursements healthy

LARSEN & TOUBRO Q2

Net sales: Rs93.4 billion (expected range Rs84.9 billion-Rs95.6 billion)

Net profit: Rs6.94 billion (expected range Rs6.2 billion-Rs8.1 billion)



Highlights:

  • Sales were at the higher end of the expected range and net profit at the lower end.
  • Among its divisions, core engineering & construction and machinery & industrial products recorded very strong growth but electrical & electronics were weak.
  •  Execution has picked up. This was a major worry in Q1.
  •  Margins, flattish, were in line with expectations.
  • Other income was higher as the profit from sale of investment in Satyam (about Rs700 million) and sale of property (another Rs700 million) was included in this quarter itself.
  •  Order inflows were strong (Rs360 billion for the first half now) and were driven by the power & infrastructure segments. L&T's own in-house development projects contributed to 28% of the total inflows (vs. 5% in 1HFY10). Inflows from oil & gas are considerably reduced.
  •  Guidance maintained at 25% order inflow growth and 20% revenue growth for FY11.
  • Management suggested that FY11 margin is likely to remain broadly at FY10 levels of about 13% - however, for that to happen, margins will have to go up in 2H.
  •  L&T Infotech showed a sharp pickup in revenues.
  • Working capital increased to Rs49.5 billion at the end of H1FY11 (40 days of sales) from Rs26.3 billion at the end of FY10 (26 days of sales).
  •  Debt levels went up to Rs77 billion at the end of the first half from Rs68 billion at the end of FY10 - this led to higher interest costs.


HDFC Q2

NII: Rs10.85 billion (expected range Rs9.7 billion-Rs13.2 billion)
Net profit: Rs8.07 billion (expected range Rs7.6 billion-Rs8.1 billion)



Highlights:

  •  Net profit was at the higher end of the expected range.
  •  Loan growth, at 20%, was in line with expectations.
  • Borrowing costs for NBFCs not yet started picking up, leading to stable margins. Could increase in the December quarter.
  •  Retail disbursements were up 30% y-o-y (63% in Q1); overall disbursements were up 28% y-o-y (25% in Q1).
  •  Did not sell down any loans this quarter.
  • Fee income at Rs681 million was stable y-o-y and up three times q-o-q mainly because of higher corporate business.
  • Spreads were stable q-o-q at 2.34% - competitive pressures have not yet touched HDFC.
  • Contribution from investment-linked income was lower as treasury gains and dividend income declined.
  •  Costs of funds declined q-o-q to just a little under 7%.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

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