Top 5 Penny Stocks Held by FIIs in India. An Exciting Opportunity?

Regardless of what you've heard or been advised, you can't stay away from penny stocks for long.

These stocks trade for low prices and have a low marketcap. They are often said to be dangerous. Call them penny stocks or microcaps, many people just assume that they're bad.

But if selected carefully, they can give a much needed push to your portfolio.

Penny stocks are those with a price less than Rs 100 per share and a marketcap of less than Rs 10 bn. There's no general definition for penny stocks in India. But these are the 2 general thumb rules for classifying penny stocks.

Penny stocks have been very popular among investors ever since the bull market began in 2020. The retail crowd, especially, has taken a liking to these stocks. The reason?

Penny stocks offer the chance to make quick profits in a short time.

Now, you'll think only retail individuals are crazy enough to chase penny stocks. But that, in fact, is not true. You'll be surprised to know that even mutual funds and foreign investors have a liking for Indian penny stocks.

Historically, FIIs (foreign investors) have bought into large-cap stocks. Mutual funds or FIIs do not usually invest in penny stocks because of the risks associated with them.

But they know for a fact that fundamentally strong penny stocks can generate stellar returns. There are a few penny stocks which have high FII shareholding and even high mutual fund exposure.

Let's take a look at the penny stocks which have the highest FII shareholding.

#1 Winsome Textile Industries

Winsome Textile Industries is engaged in the manufacturing of 100% cotton yarn and cotton yarn blended with viscose, polyester, acrylic, linen, wool, and value-added yarns like melange and solid dyed.

It's also engaged in the manufacturing of knitted fabric of various blends.

Apart from catering to the domestic market, Winsome Textile also exports its products. In fiscal 2021, the export income constituted around 42% of total revenues.

The company has been in this line of business for nearly four decades. It has established relations with suppliers and buyers. It supplies yarn to well-known domestic companies which in turn supply the finished product to reputed global brands like GAP, H&M, Marks & Spencer, and Tommy Hilfiger.

Coming to the company's shareholding, out of the total 19.8 million shares outstanding, 32.5% stake or 6.5 million shares are held by foreign investors as of December 2021.

Here's a detailed breakup:

FII	No of Shares	% Of Total Equity
Aspire Emerging Fund	19,78,590	9.98
Sparrow Asia Diversified Opportunities	9,89,000	4.99
Bao Value Fund	9,88,785	4.99
Leman Diversified Fund	9,88,000	4.98
Davos International Fund	9,87,500	4.98
Aegies Investment Fund	3,15,000	1.59
Emerging Market Opportunities Fund	2,03,125	1.02
Total	64,50,000	32.54

Data Source: BSE

Meanwhile, promoters of the company own a huge chunk (55.7%).

On the financials front, the company's sales have been in line over the years while the profit figures for 2020 and 2021 took a hit.

It's debt to equity ratio is also above 1 and has stayed above that level for over 20 years! What's more, the company has no track record of paying dividends since 2011.

Despite all this, the company's shares have gained a massive 160% over the past one year.

#2 Visa Steel

Next penny stock on our list is Visa Steel, engaged in the manufacturing of iron and steel products and high carbon ferro chrome.

As of December 2021, FIIs hold 21.95% stake in the company with Vikasa India EIF fund holding most of the shares.

This holding has stayed constant for over 12 quarters now. None of the foreign investors are selling their stake even in the recent turmoil when bluechips faced the brunt of FII selling. That's very interesting.

Promoters of the company hold 58.9% stake, having pledged their entire holdings.

The company is saddled with debt and has a track record of inconsistent sales and consistent losses.

Financial Snapshot

(Rs m)	FY17	FY18	FY19	FY20	FY21
Total Income	15,767	21,221	14,302	6,950	9,946
Total Expenses	15,009	20,273	14,398	7,333	9,901
PAT	(1,334)	(897)	(1,616)	(1,919)	(11,973)
Total Debt	38,845	36,293	35,169	34,794	34,722

Data Source: Ace Equity

Despite all this, shares of the company have gained in the past one year.

#3 Bliss GVS Pharma

Next on our list is a pharma company, engaged in manufacturing, marketing, trading and export of pharma formulations in the form of suppositories, pessaries, capsules, tablets, and syrups.

Bliss GVS Pharma has presence in more than 64 countries and a leading presence in Sub-Saharan Africa. According to the management, Bliss has market share of more than 75%, in private label sales of anti-malarial segment in sub-African region.

The company is trying to establish in Latin America, Southeast Asia, Europe, and North America.

It contracts and manufactures suppositories and pessaries for Sanofi, Sun Pharma, Mankind, Alkem, etc.

As of December 2021, foreign investors have 19.6% stake or 20.3 m shares. FIIs have been reducing their stake consistently over the past seven quarters. In March 2020, FIIs stake stood at 24.2%.

Apart from FIIs, even domestic institutional investors hold a significant stake (6.7%). This DII is none other than India's insurance behemoth - Life Insurance Corporation (LIC).

LIC has increased exposure from 1.62% it held back in March 2019 to 6.66% at present.

Coming to company's financials, it has a decent track record on the profitability and sales front while debt metrics are also under control.

Financial Snapshot

(Rs m)	FY17	FY18	FY19	FY20	FY21
Net Sales	3,480	2,979	4,266	4,420	4,655
Sales Growth (%)	7%	-14%	43%	4%	5%
Operating Profit	1,096	995	1,289	1,372	1,091
Net Profit	591	570	744	923	675
Net Profit Margin (%)	17%	19%	17%	21%	15%
Debt	754	938	717	881	889
Debt to Equity (x)	0.15	0.17	0.12	0.13	0.12

Data Source: Ace Equity

On the dividend front too, it has consistently rewarded shareholders to some extent.

#4 Zee Learn

Another penny stock with significant FII holding is education company Zee Learn.

Zee Learn is a diversified premium education group which delivers learning solutions and training through its multiple products and brands. It's also in the business of providing and servicing school infrastructure on long-term lease agreements.

Out of the total 326.1 m shares, 61.1 m shares, or 18.7% stake is held by FIIs. This stake has consistently reduced over the quarters.

Shares of the company are under pressure since the start of this year as FIIs and other entities sell stake. In January this year, Morgan Stanley Asia (Singapore) Pte offloaded 47,69,108 equity shares while IndusInd Bank also sold 71,32,775 equity shares.

The company was buzzing last year when one of the FII, New York-based hedge fund Moon Capital, asked the company's promoters to leave Zee Learn, citing piling debt, corporate governance lapses, and an absence of a clear growth strategy.

Reports also emerged back then that Byju's is looking to acquire 51% in Zee Learn. There are no further developments regards to this manner.

#5 Balaji Telefilms

The last penny stock on our list is Balaji Telefilms.

Balaji Telefilms is in the business of production of films, event business, B2C and B2B digital content business and operates a subscription based video on demand (SVOD) over the top (OTT) platform, distribution of films.

The company has established itself in the business of television content in India particularly for Hindi language content.

The company has been in the telefilms business for over 25 years and has produced more than 150 shows across 5 languages which includes some of the most successful shows in the television industry in India.

Coming to the company's shareholding, foreign investors hold around 18.5 m shares or 18.34% of the total shares outstanding.

Here's a detailed breakup:

FII	No of Shares	% Of Total Equity
VANDERBILT UNIVERSITY - ATYANT CAPITAL	45,80,064	4.53
THE DUKE ENDOWMENT	17,86,420	1.77
GOTHIC CORPORATION	48,28,550	4.77
ATYANT CAPITAL INDIA FUND I	40,78,223	4.03
GOTHIC HSP CORPORATION	22,08,291	2.18
Total	1,85,45,244	18.34

Data Source: BSE

These investors have consistently held most of their stake in the company for the past three years.

Meanwhile, DIIs including mutual funds have had an on-off holding in the stock since its listing. Their stake was mostly above 9% in the first decade and went down to merely 2% later. At present, it's nil.

Stock of the company is buzzing lately and has gained on the bourses in the past month, all thanks to Ekta Kapoor.

As per an article in The Economic Times, there's optimism that the company will get its movie business right (as cinema halls have opened) and will deliver on OTT platforms.

The company's business was affected during the pandemic as theatres stayed shut and shootings got halted. This affected production schedules and the whole entertainment industry struggled to deliver fresh content.

Which other penny stocks have high FII holding?

Apart from the above, here are other penny stocks which have significant exposure to foreign investors.

Company	FII Holding (%)	Current Price (Rs)
Housing Development & Infrastructure	16.63	7.6
Niyogin Fintech	15.32	64
New Light Apparels	14.68	22.5
Tourism Finance Corporation Of India	14.14	64.7
Yaari Digital Integrated Services	13.69	57.15
Orient Abrasives	13.24	29.8
Sicagen India	12.33	22.75
S.E. Power	12.21	22.9
Dhanlaxmi Bank	11.49	12.61
Oriental Trimex	11.18	12.23

Data Source: Ace Equity

The road ahead...

After putting in US$23 bn in Indian markets in fiscal 2021, FIIs have massively slashed their fresh exposure to US$3.7 bn in fiscal 2022.

While there are instances of a similar situation where FIIs sold off positions in the past, never before have Indian equities come under so much intense discussion and scrutiny with regards to FIIs.

Some believe the Indian growth story is still on. Others say the elephant has run out of steam.

So what's the course of action if the penny stock in your portfolio has high FII exposure?

Regardless of the FII or mutual fund holding and their activity, your thought process must be clear.

You must select a fundamentally strong stock which pays dividends, has a maintainable debt to equity ratio and a decent track record of sales and profits.

None of the stocks discussed above have all these traits combined...there is some flaw in each of them.

So we would advise you take FII holding with a pinch of salt and focus more on long term investing. Of course, you should always keep a watch on shareholding factors such as promoter pledging and promoter holding but that should not make up for your entire decision.

Regardless of FII holding or mutual fund holding, if you choose the best penny stocks for the long haul, you may find your next Bajaj Finance or Titan in the making.

A long-term horizon tends to negate the adverse effects of volatile FII fund flows.

You need to understand that a fundamentally strong penny stock will attract investors (FII or otherwise) over the long-term once the true value of the company is understood.

The idea is to conduct one's own research and hold onto fundamentally strong stocks. Let the fundamentals dictate investment decisions, not FII fund flows or FII holding.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.