Foreign Institutional Investors (FIIs) have been called all sorts of names, 'hot money' being a term of choice. Those using it conveniently forget that at most times, it is only after their entry into a particular counter that the stock sizzles. In the current frenetic market FII activity is being closely monitored, as always. In the month of August, FIIs have been net sellers to the tune of $1.4 billion and that includes the $773 million that they sold when the Sensex tanked 1,600 points on Monday. Right now, sentiment seems to be turning but it is hard to predict if the pain is over as FIIs hold a significant chunk of BSE-200 companies. In fact, in some companies they are the largest shareholders or hold more equity collectively than the promoters. It is such companies that we tried to narrow down on to figure out which of them could be more vulnerable, if the current uncertainty becomes a trend. Following is our list of companies where valuation could take a serious knock if the tide again turns for the worse.
Walking on the edge
Along with great FII interest also comes great FII selling pressure
FIIs hold close to 50% of this global agrochemical player. And they have been rewarded well as the stock delivered close to a 90% return over the past one year. In this current carnage, too, it is only down 7% from its high. While the business is performing well, pressure is now building because of the lower-than-expected monsoon impacting demand for agrochemicals. Moreover, the current valuation of close to 4X book value and 20X earnings could come in for closer scrutiny in bad times. Given that the stock is fairly liquid, it could face selling pressure from FIIs who might want to look for the fastest way out.
This is one pizza-maker whom investors can’t seem to have enough of. That hunger has made it a valuation enigma with a 100X discounting. FIIs hold 42% of the equity and presumably expect the good times to roll for this ‘pure consumer play’. Investors are also hoping for a revival in discretionary spending as in Q1FY16, same-store sales grew a mere 4.6%. That tepid growth continuing this year might take some sheen off the premium multiple that the company commands. But for now, its return on equity of 20% is warm enough to relish.
It is among the very few options that India provides in the listed space to own an e-commerce company and FIIs have been visibly excited, holding close to 39%. Interestingly, as the stock corrected 50% from its high, the promoter and DIIs have increased their stake. While data usage could get fueled with 4G, the call for correction in the valuation of e-commerce companies is getting louder. Despite the 50% correction, Just Dial still trades at 40X earnings. That apart, there is a growing feeling that Just Dial may not be able to combat the late entrants who are flush with PE funding and are posing tough price competition backed by that very cash.
This two-wheeler giant is a major rural play, and FIIs own over 38% of the company, more than the promoter holding at 35%. In the recent correction, it lost 12% and hasn’t shown much inclination to bounce back. Fundamentally, the rural theme is taking a backseat with below expectation monsoon, stagnating MSPs and lower commodity prices eroding purchasing power and impacting demand. Analysts have already lowered their volume growth estimates to around 4-5%. A two-wheeler is certainly more durable than a pizza hence, if the stock takes a considerable beating, institutions wanting to get in cheap will line up fast to replace exiting investors.
Mahindra & Mahindra
This is another FII darling driven by rural and agriculture farm equipment. The business is a sure draw for them as is the top-class governance. But that gets momentarily forgotten in times of panic. The worries include shrinking affordability and a consequent slowdown in the rural market. It reported a 4% decline in sales and 7.3% fall in profit in Q1FY16, the result of a sharp decline in tractor sales (accounts for 36% of topline) by close to 19% and a lackluster growth in auto volumes at less than 2%. If the expected revival does not play out, the counter could face increased selling pressure.