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Stock Analysis, IPO, Mutual Funds, Bonds & More

5 stocks that foreign portfolio investors are buying now

Historically, FPIs have bought into large cap counters. But it is different this time and they are now concentrating on mid-caps. A concentrated large-cap rally during the past year and resultant high valuation are the reasons why FPIs are bypassi...

, ET Bureau|
Updated: Nov 18, 2019, 04.04 PM IST
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Foreign-investment-getty
Inflows from foreign portfolio investors (FPI) are expected to continue for some more time.
After months of selling, foreign portfolio investors (FPI) are buying Indian equity again. Net inflows as of 11 November stood at over Rs 30,000 crore. The question now is whether this FPI inflow will continue in the coming months. Experts feel it will due to several factors. First, the liquidity crisis in the domestic financial system is easing on the back of increased government spending over the past few months. There had been a contraction of government spending due to elections and new government formation, but it has picked up again from July.

The next reason is Indian companies have been able to show significant improvement in operating margins due to the fall in commodity prices. This along with the reduction in corporate tax rates, helped companies report fabulous net profit growth. Since lower tax impact is a permanent feature, net profit growth is likely to be better in the coming quarters.

The third factor that is attracting FPIs now are the government’s measures to stimulate the economy. “Favourable factors are attracting smart money back to Indian markets. This trend will continue if the government continues with its reform measures,” says Kunj Bansal, Partner & CIO, Acepro Sarthi Group.

Favourable global economic setting, like the US Federal Reserve cutting rates, etc is also channeling inflows to emerging markets like India. “Due to the global slowdown and lack of opportunities in developed markets, global investors have turned positive towards emerging markets, including India,” says Vinod Nair, Head of Fundamental Research, Geojit Financial Services. Since global investors are chasing growth now, will the ongoing economic slowdown in India derail these inflows? The answer is no. “GDP growth for the September quarter may be even below 5%. However, FPI inflows may not get impacted due to this slower growth, because our growth rates are still better compared to other countries,” says Bansal.

FPIs are buying after months of selling
FPI-Buying

Historically, FPIs have bought into large cap counters. However, it is different this time and they are now concentrating more on mid-cap counters and that is one reason why the market cap of all stocks shortlisted for this story are below Rs 30,000 crore. A concentrated large-cap rally during the past year and the resultant high valuation are the reasons why FPIs are bypassing large-caps. “FPIs’ current mid-cap focus is because correction has brought down the valuation there. Since valuation in this segment is still favourable, this trend is expected to continue in the medium to long term,” says Nair.

We have used several filters to shortlist stocks that have witnessed an increase in FPI inflows. First, only stocks with at least 5% increase in FPI holding compared to the same period last year (y-o-y) and 1% increase compared to the previous quarter (q-o-q) were selected. We only selected stocks recommended by at least five analysts and these stocks also have a potential upside of at least 15% from current market prices. We also eliminated a few companies with extreme valuation ratios.

With customers postponing purchase of new commercial vehicles, the demand for used vehicles is rising. This has come as a boon for companies financing used vehicles like Shriram Transport. Its used vehicle disbursements during the second quarter of 2019-20 grew by 7% y-o-y and 9% q-o-q. The share of used commercial vehicles in its loan book went up from 82% to 84% y-o-y. Sales of new vehicles are also expected to pick up during January-March 2020.

Hike in FPI holding (%)
  • Y-o-Y: 12.05
  • Q-o-Q: 4.35
  • CMP (Rs): 1,121.25
  • Target price (Rs): 1,304.63
  • Potential gain: 16.35%

Shriram Transport

Analyst Views
  • Buy: 34
  • Hold: 4
  • Sell: 2

Shriram Transport’s initiatives like reduction in loan to value ratios, digital collections, regular visits to borrowers, etc are expected to improve asset quality in coming quarters. “Initial signs of healthy business pick up, core operating metrics stabilising and improving funding environment should translate into steady 15% RoEs over 2021-22 with positive upward bias,” says a recent Prabhudas Lilladher report.

  • Ujjivan Financial Services
Ujjivan Financial Services is the holding company and promoter of Ujjivan Small Finance Bank (USFB). USFB has reported a net profit of Rs 93 crore, a growth of 111% y-o-y, during the second quarter of 2019-20. Being a new entrant, USFB’s gross and net NPAs are at 0.9% and 0.3% respectively.

Ujjivan Financial Services will soon launch the IPO of USFB. This IPO is expected to raise Rs 1,200 crore. This listing will make Ujjivan Financial Services a parent of another listed company and such parent companies usually trade at a discount to its listed subsidiaries.

Hike in FPI holding (%)
  • Y-o-Y: 6.59
  • Q-o-Q: 1.12
  • CMP (Rs): 274.55
  • Target price (Rs): 324.73
  • Potential gain: 18.28%

Ujjivan-Financial-services

Analyst Views
  • Buy: 10
  • Hold: 5
  • Sell: 3

To avoid this holding company discount and to bring down the promoter holding of USFB below 40%, Ujjivan Financial Services is planning approach RBI to explore the possibility of reverse merger. Due to these factors, Ujjivan Financial Services is quoting at reasonable valuations and is the reason why FPIs are increasing their stake in this counter. “We arrived at our price target of Rs 360 based on the assumption that the planned capital raising entails 15% dilution and 1 year forward holding company discount of 40%,” says a recent Yes Securities report.

  • Bharat Electronics
Bharat Electronics supplies advanced electronic equipment to the Indian armed forces. Being a state-owned aerospace and defence company, military orders are flowing to it on a regular basis. For example, Bharat Electronics has bagged orders worth Rs 7,088 crore in the second quarter of 2019-20 and its total order book on 30 September stands at Rs 56,178 crore. It also has an export order book of $158.5 million as on 30 September.

Hike in FPI holding (%)
  • Y-o-Y: 6.51
  • Q-o-Q: 2.52
  • CMP (Rs): 108.85
  • Target price (Rs): 126.19
  • Potential gain: 15.93%

Bharat-Electronics

Analyst Views
  • Buy: 17
  • Hold: 3
  • Sell: 6

A strong order book gives clear revenue visibility for the coming years. Bharat Electronics is diversifying into non defence segment like homeland security, cyber security and work related to smart cities, etc. Revenue from the new initiatives reached the 20% mark during the second quarter. Bharat Electronics is also the main supplier of EVMs. Reasonably high EBITDA margin is another point worth mentioning. “Traction in execution and a favourable product mix is expected to help Bharat Electronics to maintain its EBITDA margins at around 20% levels in future,” says a recent ICICI Direct report.

Aster DM is an ideal candidate to benefit from the expected boost in medical tourism. With presence in all healthcare segments—hospitals, pharmacies, etc—Aster DM has a well-diversified business profile. With presence in seven Gulf Cooperation Council (GCC) countries and an established brand in south India, Aster DM also has a well-diversified geographical profile. Therefore, transfer of patients from GCC countries to Indian hospitals for complex treatment is easy.

Hike in FPI holding (%)
  • Y-o-Y: 6.20
  • Q-o-Q: 1.72
  • CMP (Rs): 145
  • Target price (Rs): 192
  • Potential gain: 32.41%

Aster-DM

Analyst Views
  • Buy: 8
  • Hold: 0
  • Sell: 0

“Aster DM is an attractive play on the mandatory insurance coverage in GCC and the increasing insurance penetration in India,” says a recent JM Financial report. Since Aster DM is reporting high growth rates (grew by a CAGR of 35% in the past 5 years) and is expected to grow faster in coming years, its current low valuation (discount of around 50% compared to peers) is not justifi ed. The risk-reward is favourable at current valuations and a rerating in this counter is expected in the near future.

  • Redington India
Despite the ongoing economic slowdown, Redington has surprised the street with revenue growth of 11% y-o-y and 6% q-o-q in the second quarter of 2019-20.

More importantly, the domestic growth (15.3% y-o-y) was better than its growth from the overseas business (8.5% y-o-y). Net profit growth would have been higher than 27% y-o-y had the ProConnect business—supply chain solutions—had not dragged it down. The ProConnect woe was more related to some vendor-specific issues and therefore, this issue is expected to get resolved in the next one or two quarters. In other words, this is not going impact the long-term business prospects of Redington.

Hike in FPI holding (%)
  • Y-o-Y: 5.57
  • Q-o-Q: 4.77
  • CMP (Rs): 115.85
  • Target price (Rs): 135.86
  • Potential gain: 17.27%

Redington

Analyst Views
  • Buy: 10
  • Hold: 0
  • Sell: 0

“We remain confident of strong revenue growth and improved profitability driving return on capital employed (RoCE) expansion for Redington to 16–18% by 2020-21,” says a recent Edelweiss report. In addition to the improvement in its business, the current low valuation is another major attraction in this counter. For example, it is now quoting at a PE of just 8.10 times.

All index values normalised to a base of 100.

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