Soaring high

There are two things that could happen to a stock when it is aggressively accumulated by foreign institutional investors (FIIs). First and foremost, it leads to a re-rating as everyone starts to follow what the FIIs are buying. Second, it usually creates huge demand, leading to an expansion of multiples which, in turn, results in occasionally higher stock prices. Buying into such stocks may not be a sure shot way of creating wealth but if you can spot some of these opportunities early on, the payoffs could be decent.

Unfortunately, more than Indian investors, India’s story has been bought by foreigners post the May 2014 general election results. The difference is stark: while FIIs bought Indian equities worth Rs 46,000 crore, domestic mutual funds bought stocks worth Rs 23,484 crore. The past six to eight quarters have seen some stocks turning out to be new favourites, where foreign investors have been consistently building up stakes.

If you have missed the bus, Outlook Business has crunched the numbers of FII holdings in the BSE 500 universe over the past eight quarters to find out which stocks have caught their eye. The following snapshot profiles six such names to gauge as to what makes them such exciting prospects.

Cera

With a market share of about 40%, Cera has emerged as one of the preferred choices of many institutional investors — a direct impact of India’s housing boom. Its high return ratios (RoCE of 33%), low debt and strong growth in its segments, driven primarily by the strong branding efforts, have attracted institutional participation. From an earlier 3% stake, institutional investors now own 16% in the company. Over the last two years, earnings have grown at 29%. Going ahead, Crisil estimates earnings growth to remain buoyant at 30.4% over the next two years. 

Kaveri Seeds

Backed by strong research and product development, Kaveri Seeds has emerged a key player in the seeds industry, particularly in cotton. With a market share of 20%, there has been strong growth in both revenues and earnings. Maize and rice are considered to be the coming areas of growth given the low hybridisation coupled with growing demand. The street is expecting this to translate into a strong growth of about 25-30% in earnings. Investors are hooked on to the stock, given a strong business model and a robust balance sheet. The company has Rs 280 crore cash (55% of networth), return on equity in excess of 45% and a leadership in its products.

PVR

A leading multiplex chain in India with 9,000 screens, PVR is considered to be a key consumer player in and a beneficiary of India’s growing young population. The company, in the past, has consolidated its position with the acquisition of Cinemax and expansion into regional markets leading to strong growth. Sales have grown from Rs 300 crore in FY10 to Rs 1,300 crore in FY14 and the profit over the same period has jumped six-fold to Rs 48 crore. Besides the structural growth drivers of an improving economy and discretionary spending, the Street is hoping that PVR will benefit from its occupancy levels improving from the current 34% to higher digits in the long run.

Century Plyboards

The plywood manufacturer’s stock price has quadrupled in the past one year even as FII holding increased to 5.87% from 0.97% over the past eight quarters. Revenue growth has been at a respectable 15% compounded annual growth rate in the past five years. Going ahead, the company, which has a 21% share in the organised plywood industry, expects 25% growth in FY15 from a revival in India’s home building industry and the structural shift to branded players from the unorganised segment owing to the narrowing price differential. Also, Century, which imports around 65% of its raw material, is expected to gain from the appreciation in the rupee whose volatility had cost the company a forex loss of Rs 44 crore in FY14 and resulted in the consolidated PAT declining from Rs 183 crore to Rs 63 crore.

Mayur Uniquoters

The synthetic leather manufacturer has an installed capacity of 18 million linear metres and supplies leather to OEMs of footwear (50%), automobiles (35%) and assorted leather products (15%). Over the past eight quarters FII interest has jumped several fold in the stock. Justifiably so, because in the past five years, the company has seen a CAGR of 30% in sales and 37% CAGR in net profit. The management expects 25% YoY growth in high-margin exports to clients such as Ford and Chrysler in FY15. Besides, growth will be driven by 2.5 times increase in the current production capacity to cater to increasing export demands. With an imminent pickup in domestic consumption, it looks like Mayur stands to reap the rewards.

Persistent Systems

Persistent Systems, the Pune-based IT services provider, has around 8,000 employees and 350 clients scattered across North America, Europe and Asia. It has a strong balance sheet with cash of Rs 957 crore and low debt. Its business fundamentals are backed by healthy net profit margins (14.9%) and strong RoE, resulting in FIIs increasing their holdings from 2.1% to 27.71% over the past eight quarters. Margin outlook in H2FY15 is mixed on account of headwinds such as rupee appreciation and wage hikes, while tailwinds include positive growth in its intellectual property business, a healthy order pipeline and continued demand for its platform technologies.