Identifying Over-Owned/ Under-Owned Stocks:: BofA Merrill Lynch

Identifying Over-Owned/
Under-Owned Stocks
„FII portfolio: O/W on Industrials & U/W on Consumer Staples
rise and O/W on Cement & U/W on Utilities fall
„ During 1QFY14, foreign institutional investors (FII) & LIC were net buyers
while domestic MFs were net sellers
„ FII holding in Sensex has gone up to the highest level in last 8 years whereas
the promoter shareholding is the lowest in last 8 years.
„ For the first time in 5 years, financials is not the most O/W sector for the FIIs.
Financials has been replaced by Consumer discretionary as the biggest O/W
sector for the FIIs. O/W for this sector is at the highest level since 2008 and 3
out of the top-10 over-owned stocks are from this sector.
„ Most defensive stocks in Pharma and consumers are currently close to their
all time high FII ownership, e.g., Lupin, ITC, Sun Pharma.
„ Heavy buying in Industrials led to a significant increase in its overweight.
Selling in consumer staples coupled with addition of GSK Consumers in
MSCI India led to an increase in its underweight. Changes in free float and
addition of 4 stocks (GSK Consumer, Oil India, Wockhardt, Apollo Hospital)
led to some changes in O/W or U/W in FII portfolio.
Key stocks bought: ICICI Bank, DLF, ADSEZ, Oracle Fin Serv and Dr Reddy
Key stocks sold: HUL, TCS, RIL, Infosys and SBI
Domestic MF portfolio: O/W on Utilities & U/W on Software
falls; O/W on Consumer Staples & U/W on Financials rise
„ Domestic mutual fund portfolio is in contrast with that of FIIs, with Financials
being major underweight sector, sector on which FIIs are heavily O/W. They
are also underweight Consumer discretionary where FIIs are O/W. Domestic
mutual fund portfolio is heavily overweight on Consumer Staples where FII
are underweight. However, on the similar lines of FIIs, domestic mutual funds
are also underweight Software, metals & mining sector and Energy sectors.
„ In contrast to FIIs, domestic mutual funds sold Pharma, Utilities, Financials.
On the other hand similar to FIIs, they sold Consumer, Energy.
LIC net buyer
„ On the similar lines of FII, LIC was a net buyer. LIC bought Software (Infosys,
Wipro, TCS), Metals & Mining (MMTC, Coal India), Energy (RIL, Cairn India).
LIC sold Pharma (Dr Reddy).

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FII ownership analysis
FII interest remained positive in 1QFY14 in the Indian markets. This was the 4th
consecutive quarter when the Indian markets have seen positive flows from the
FIIs. However, compared to a $10bn inflow of the previous quarter FII net inflow
was just ~$2bn for the quarter.
„ Consumer discretionary has emerged to be the highest O/W sector
replacing Financials which was the maximum O/W sector for last 5
years. The increase in O/W was mainly due to decline in free float of
Zee Ent. 2 auto stocks (Tata Motors & Hero Motocorp) continue to
figure in the top-10 over-owned list. Zee Entertainment is the new
entrant on the top-10 over-owned list.
„ Financials is now the second highest O/W sector. Muted buying
compared to its weight in FII portfolio largely negated the impact of
lower free floats of some of the financial stocks. ICICI bank continues
to be the top over-owned stock by FIIs. Bank of Baroda is the new
entrant on the top-10 over-owned list largely on account of reduction
in free float in MSCI. 3 financial companies continue to figure on the
top 10 under owned list (HDFC, HDFC Bank & SBI).
„ Software continued to be the largest U/W sector for the FIIs. The
sector saw an increase in its U/W due to muted buying by FIIs
compared to its weight in FII portfolio.
„ Energy was the 2nd largest U/W sector for the FIIs. The sector saw an
increase in its U/W mainly due to addition of OIL in MSCI Index.
„ Consumer Staples saw the highest increase in its U/W during the
quarter. This was mainly due to net selling and addition of
Glaxosmith CHL in MSCI India Index.
„ Industrials saw the highest increase in it O/W which was mainly due
to heavy buying during the quarter.
„ Despite Wockhardt addition in MSCI India Index, heavy buying and
decrease in free float of Lupin resulted in significant increase in O/W
of Healthcare sector. Lupin also emerged on the top-10 over-owned
list during the quarter
„ Real estate saw an increase in O/W and utilities saw a decrease in
its U/W due to heavy buying by the FIIs during the quarter.
„ Cement saw a decrease in its O/W due to increase in free float of
Ambuja Cement in MSCI India Index.
„ Key buys in this quarter for the FIIs were: ICICI Bk, DLF, Adani Port,
Oracle Fin Services and Dr Reddy.
„ Key sells were for the FIIs during the quarter were: HUL, TCS, RIL,
Infosys and SBI.

Over-Owned/Under-owned Stocks and Sectors
by FIIs
We have updated our analysis of FII holdings to determine the sectors and stocks
that FIIs as a whole are OW / UW on, following availability of the shareholding
pattern as on Jun 30, 2013.
Methodology Recap
Based on FII holdings in individual BSE-500 companies, we calculated an
aggregate FII portfolio in India and their percentage holdings in various stocks
and sectors. We then compared this with the MSCI weight to determine sectors
and stocks that FIIs are O/W/U/W on. One anomaly is in the companies that have
issued ADRs/GDRs. Given that these are also partly held by non-FIIs, we should
ideally have included only the FII holding of GDRs/ADRs in our analysis.
However, since we do not get a separate break-up of the ADR/ GDR holding into
FIIs/ non-FIIs, our analysis may show a higher FII weight in stocks with a high
ADR/ GDR component, than is actually the case. We have also included FDI into
the FII stake.
Sector Ownership- O/W on Industrials & U/W on Consumer
Staples rise and U/W on Utilities fall
„ Pharma: Phama saw the highest net buying by the FIIs. FIIs bought
popular largecap names such as Dr Reddy (USD 210mn), Lupin
(USD 110mn).
„ Industrials: The sector saw heavy buying during the quarter. FIIs
bought ADSEZ (USD 250mn), Adani Ent (USD 65mn). However FIIs
sold L&T (USD 110mn).
„ Financial: Financials, one of the biggest O/W sector, saw net buying
by the FIIs. FIIs bought popular largecap names such as ICICI Bk
(USD 310mn), HDFC (USD 80mn). However FIIs sold SBI (USD
170mn), Yes Bk (USD 80mn).
„ Software: Software saw net buying by the FII’s. They bought Oracle
Fin. Serv. (USD 245mn), Just Dial (USD 150mn). However, they sold
popular large cap names such as TCS (USD 240mn), Infosys (USD
190mn).
„ Consumer staples: Consumer sector saw net selling by the FIIs.
They sold HUL (USD 400mn). However they bought Emami (USD
110mn)
„ Utilities: Utilities saw significant buying during the quarter. They
bought NTPC (USD 190mn).
„ Energy: Energy sector saw net selling by FIIs. They sold RIL (USD
210mn). However they bought Oil India (USD 115mn).
„ Cement: Cement saw some selling by FIIs. They sold Ambuja
Cement (USD 75mn).

Historical Snapshot of the Sector-Ownership Patterns
„ Financials is no longer the biggest O/W sector in FII portfolio.
Financial’s o/w is around the lowest level since ‘08. The sector
despite being heavily bought by FIIs has seen its o/w come down due
to inclusion of financials into the index during the years.
„ Due to decline in Zee free float, O/W on consumer discretionary is at
the highest level since 2008. The sector is now the biggest O/W in FII
portfolio.
„ U/W on consumer staples has reached to its 2009 level.
„ O/W on Healthcare has reached its peak since 2008.

Stocks Over-Owned/Under-Owned
Table 4 details the FII holdings in all MSCI stocks and the extent to which they
are O/W/U/W compared to the MSCI Index. Tables 2 and 3 list the top overowned and under-owned stocks:
Key Highlights:
„ There are 3 financial stocks in the top 10 under-owned stock list
(HDFC, HDFC Bank & SBI). The overweight on the sector has gone
up marginally during the last quarter. Overweight on the sector is
around the lowest level since 2008. Bank of Baroda has emerged as
a new entrant in the top-10 over-owned stock list. ICICI Bank
continues to be the highest over-owned stock in FII portfolio.
„ Consumer discretionary saw net selling during the quarter.
Overweight in the sector is at the highest level since 2008 with Tata
Motors, Zee Ent & Hero Motocorp figuring in the top 10 over-owned
stock list.
„ There were 3 new entry (Lupin, Zee Ent, BoB) in the top -10 overowned stock lists by FIIs.

What FIIs Bought and Sold
„ FIIs outlook on Indian markets remained positive during the quarter.
They were bullish on Pharma, Industrials, Real estate & Utilities this
quarter.
„ However FIIs were bearish in sectors like Consumer Staples and
Energy.
„ Top buys for the FIIs: ICICI Bk, DLF, Adani Port, Oracle Fin Services
and Dr Reddy. Top sells: HUL, TCS, RIL, Infosys and SBI.




Domestic Mutual Funds
In contrast to FIIs domestic MF sold Indian equities with an outflow of $750mn in
previous quarter compared to $1bn in previous quarter.
Domestic mutual fund portfolio is in contrast with that of FIIs, with Financials
being major underweight sector, sector on which FIIs are heavily O/W. They are
also underweight Consumer Disc. where FIIs are heavily O/W. Domestic mutual
fund portfolio are heavily overweight on Consumer Staples where FII are
underweight. However, on the similar lines of FIIs, domestic mutual funds are
also underweight Software, metals & mining sector and Energy sectors.
„ Industrial is one of the biggest O/W for domestic MF’s. O/W in the
sector increased mainly due to removal of Siemens from Nifty Index.
„ Consumer Staples has emerged to be the biggest O/W sector for
domestic MF’s. O/W for the sector increased significantly due to net
selling less than its weight in MF portfolio and due to increase in
weight of ITC in domestic MF portfolio.
„ Financials saw significant increase in its U/W due to heavy selling
relative to its weight, addition of IndusInd bank in Nifty Index and
increase in free float of Axis Bank.
„ Metals & Mining saw an increase in its U/W which was mainly due to
addition of NMDC in Nifty Index.
„ Software saw decrease in its U/W which was due to removal of
Wipro, decrease in weight of Infosys in Nifty Index and net buying.
„ Utilities saw an increase in U/W which was mainly due to increase in
free float of NTPC.
„ In contrast to FIIs, domestic mutual funds sold Pharma, Financials.
„ Top buys for the domestic mutual funds were: RIL, L&T, HDFC, TCS
& Yes Bk.
„ Top sells for the domestic mutual funds were: ICICI Bk, HUL, SBI,
IndusInd Bk & Oil India.
Sector ownership: O/W on Utilities & U/W on Software falls;
O/W on Consumer Staples & U/W on Financials goes up
Financials: Financials was one of the heavily sold sectors by the MFs. Domestic
MFs sold ICICI Bk (USD 175mn), SBI (USD 75mn), IndusInd Bank (USD 70mn).
Consumer: Consumers saw some selling by the MFs. They sold Glaxo Smith
CHL (USD 240mn), ITC (USD 90mn). However, they bought HUL (USD125mn).
Despite the selling, the overweight on consumers increased due to relative
outperformance of the sector.
Utilities: Utilities saw net selling by the MFs. They sold GAIL India (USD 30mn),
Petronet LNG (USD 20mn).
Software: Software was the one of the highest bought sector by MFs. They
bought TCS (USD 60mn), Wipro (USD 30mn)



Promoters
On an overall basis promoter stake in BSE-500 has gone down marginally.
Promoters decreased their stake in companies e.g. Astrazeneca Pharma,
Puavankar, Jaypee Infratech, Fortis Healthcare, MMTC. Most of this was mostly
on account of complying with the new shareholding norms of having more than
25% free float. Promoter stake went up in companies like Gujarat Gas, Adani
Power, Spicejet, HCL Infosystem amongst others. In terms of promoter pledges
companies with high promoter pledges are Guj Pipavav, Suzlon Energy, Essar
Port etc