More and more foreign institutional investors (FIIs) are coming to India. Almost everyday you have a new FII setting up shop in India. It doesn’t seem the party (Bombay Stock Exchange’s Sensitive Index) is going to stop at 14,000 levels - Head of Investor Relations with an FMCG firm.
Four years back if you had attended an investment conference organised by leading brokerage firms like DSP Merrill Lynch, JM Morgan Stanley or Kotak Securities, you would be lucky to find 20 foreign institutional investors (FIIs). This year, more than 170 FIIs participated in just two conferences organised by DSP and Morgan Stanley that were held in Mumbai and Goa in the second week of February.
In fact, JM Morgan Stanley saw participation from foreign investors double to 320 this year, with 200 people coming from overseas. "Every year, we see new investors, which explains how seriously people are looking at India. Earlier, investors came largely from Asia and the US. Now, they also come from places like Hong Kong, London and Japan," said a senior manager with a brokerage firm, who didn’t wish to be identified.
An indicator was the growing number of first-time participants. In fact, first-timers outnumbered those who have attended past meets this year. There were nearly 750 meetings between investors and companies over three days. "The scale was different," says Ridham Desai, MD & co-CEO, India Strategist, JM Morgan Stanley.
What’s driving investors is the stellar performance of the Indian stock market and the Indian economy. "The size of the market has changed. In 2003, it (the market cap) was only $100 billion; today, it is $850 billion. The market is much larger and deeper," says Desai.
In 2003, an FII with say $100 billion to invest would not have looked at India. "We have seen four major bull runs, the hedge funds are here and FIIs have expanded their team. Indian markets have been amongst the better-performing markets in the world," says a senior manager at a brokerage firm.
Also, investment options available are much wider. For instance, earlier the foreign investors only bought stocks of top 20 companies by market cap. That’s because there were only 20 companies with a market cap of $1 billion (Rs 4,400 crore) or more. Today, according to Desai, there are 120 Indian companies with a market cap of $1 billion or more. Many FIIs who would have a cut-off of $1 billion.
This was reflected at the investor conferences, which saw 50-55 corporates participating this year as against 20-25 companies that were participating four years back. In fact, the leading broking houses today track more than 100 companies. Motilal Oswal Securities tracks a whopping 230 companies. Five years back, they were tracking 15-20 companies. "This also means there are 100 great stocks to invest and even a corporate has to fight for investment," says the investor relations head of a leading FMCG major.
Consider Hindustan Lever, for instance, soon to be renamed Hindustan Unilever. Analysts have been asking investors to buy the stock as it has been trading at historically low valuations (on Wednesday, the stock closed at 195.50 on the BSE, a 12-month low). "The stock was trading at Rs 240-250 for much of the last year and a half, and is now languishing at around Rs 200. People who invested at Rs 290 have lost their money," says an FMCG analyst.
This is despite the fact that HLL has improved its performance in the last two three years, after facing slowdown in sales and profit growth since 2000-01. "Investors are not buying HLL because they have other investment options like real estate, construction. So, even if it trades below historic valuations, nobody cares for it," adds the FMCG analyst. There are other stocks like Colgate, Tata Tea or Britannia, which are trading at historically low valuations.
Also, Desai says FIIs’ risk-appetite has gone up and they are willing to look at small and mid-cap companies, who can grow their profits faster in a fast-growing economy. "Growth gets better down the cap curve as companies get the benefit of operating leverage," says Desai.
To understand what he means by operating leverage consider the hotel business, where you have high fixed costs. Now, if you have 10-storey hotel, you may not make any money if only six floors are occupied. You could break even when you sell the seventh floor. When you sell the eighth floor, the returns start to double; with the ninth floor, you get super returns. If you can sell the tenth floor, returns touch astronomical levels. "Once revenues exceed fixed costs, every additional rupee you earn goes straight into profits," explains Desai.
There’s greater participation at the investor conferences as very companies few do exclusive road shows these days, and prefer to target these conferences to meet investors. Also, organisers have tried to broaden the interest of participants by roping in a few government agencies that are delivering better performance.
For instance, JM Morgan Stanley invited Gujarat Chief Minister Narendra Modi and Railway Minister Lalu Prasad Yadav, who captivated the audience. "It is amazing to hear Modi speak. Industry needs power, water and infrastructure; Gujarat has made a lot of progress on these issues," observes an executive with a leading corporate who attended both these conferences. As long as Modi and Lalu continue to deliver, investors will keep coming back to India.