FIIs cut stake just in the last quarter, in many sectors; analysts say too early to say if upturn would sustain.

Though 2012 has started on a positive note on foreign institutional investor (FII) flows, it is too early to say if the trend will sustain through the calendar year, analysts say.

2011 was the second worst year for Indian markets in two decades, with the Sensex slipping nearly 25 per cent on the back of the euro zone crisis, the Reserve Bank of India's monetary stance and the government's policy inaction.

In the fourth quarter alone, the Sensex slipped 5.4 per cent as FIIs reduced exposure to banking, realty, metal, infrastructure, capital goods and sugar sectors due to macro-economic headwinds.

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Their net outflow from the Indian market in the recently concluded quarter was Rs 2,074 crore ($343 million).

Among prominent names, ICICI Bank, Larsen and Toubro, Tata Steel, IVRCL and Shree Renuka Sugars all saw FIIs reducing stake by a little over 100 basis points (one per cent = 100 basis points) in the December quarter (Q4).

"Metal is a high beta sector and when global slowdown takes place, the possibility of metal prices cooling is high. In India, the mining scam plus lack of reforms in the mining sector could also be reason for FIIs reducing stake in metals," said A K Prabhakar, senior vice-president (equity research), Anand Rathi.

"High interest cost, lack of funding, delay in government clearances, cost overruns, high raw material cost and corporate governance kept overseas investors at bay from the infrastructure and realty sector, while sugar is still under government control."

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Risk aversion

In the BSE-500 pack, 361 companies have filed their shareholding pattern. It shows FIIs in Q4 reduced stake in 206. They raised holdings in 144 and 11 companies saw no change. Tata Motors, LIC Housing Finance, Aban Offshore, IRB Infrastructure and GE Shipping Company are among a few where they increased holding.

Analyst feels a worsening global outlook and the consequent risk aversion to investment in emerging markets has shrunk FII inflows into India.

"With slowing GDP growth and the rupee weakness, some FIIs have downgraded India in their portfolios. They have been bearish on the high beta segments such as metals, capital goods and infrastructure. Further, sugar has been out of favour, as it is a highly cyclical and regulated industry. All in all, the December quarter has seen significant FII outflows," said Jagannadham Thunuguntla, head of research, SMC Global Securities.

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Positive start

However, 2012 has started on a positive note. The benchmark Sensex has gained 1,297 points, or 8.4 per cent, the most since it rose 9.44 per cent in the first 13 trading sessions in 2000, according to data compiled by the Business Standard Research Bureau.

The rally has been led by strong capital inflows from FIIs and anticipation of the macro economic situation improving due to monetary easing.

So far in calendar 2012, FIIs made a net investment of Rs 7,005 crore ($1,365 million) till January 20.

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"Though the New Year has started on a positive note, it still needs to be seen if the FIIs will take interest in these battered scrips," adds Thunuguntla.

"We have been positive on realty stocks and we continue to maintain this stance. Stocks like HDIL, Indiabulls Real Estate, Sobha Developers, Prestige, Mahindra Lifespace and Oberoi Realty look good in this space. Any dip should be seen as an opportunity to buy," states Prabhakar.