5 Stocks Witnessing Consistent Decline in FII Holding. Should Investors be Concerned?

Foreign institutional investors (FII) make up for a substantial investment in Indian companies.

With a keen interest in India's thriving economy, FIIs often seek undervalued assets that may not receive the same attention in other markets.

However, over the past one year, FIIs have taken a cautious stance on the Indian stock market. While you may see headlines that FIIs are coming back in recent days, the long term trend suggests otherwise.

Concerns over the Federal Reserve's global hawkishness, the potential for an economic downturn in developed nations, and emerging issues like the banking crisis and supply chain bottlenecks have fuelled their apprehension.

This has led them to adjust their stakes in various companies, reflecting changing investment preferences.

In this piece, we highlight the top five companies that have seen consecutive selling by FIIs as they have fallen out of favour.

These companies are filtered using Equitymaster's Indian stock screener.

#1 Trent

First on the list is Trent.

Trent is the retail arm of the Tata Group that houses well-known brands such as Westside, Zudio, Star, and Zara.

The company has emerged as one of the fastest-growing companies in the Indian retail sector. This comes on the back of accelerated store additions, increasing brand recognition and the relentless rise in consumer spending over the last few years.

Trent's industry dominance and well-established brands have propelled its margin profile, culminating in healthy cashflows. These massive cash holdings have ensured the aggressive store addition plan continues with ease.

Trent Financial Snapshot (2018-2022)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	21.34%	36.08%	-23.13%	67.23%	81.95%
Operating Profit Margin (%)	9.84%	18.63%	13.62%	15.72%	15.39%
Net Profit Margin (%)	3.31%	2.80%	-6.40%	0.71%	4.41%
Return on Capital Employed (%)	10.62%	17.74%	2.11%	15.93%	32.28%
Return on Equity (%)	5.85%	5.25%	-7.71%	1.48%	15.88%

Source: Equitymaster

While the revenue has grown handsomely at a 5-year CAGR of 30.6%, the net profit has registered a growth of 35.6% during the same time.

The company has reported a 5-year average Return on Equity (RoE) and Return on Capital Employed (RoCE) of 4.1% and 15.7%, respectively.

Despite its dominant presence and strong growth profile, the stock seems to have fallen from graces for FIIs.

The level of FII holding in Trent has fallen from 26.8% in the quarter ending June 2022 to 19.9% in March 2023.

Now, FIIs' selling activity usually indicates that a stock is overvalued, but FIIs have been net sellers in the Indian markets for some time now.

Trent is trading at a price to earnings (PE) multiple of 205 times, a 35% premium to its 5-year median PE of 157 times.

The company's quarterly financial performance has been erratic. While it has improved considerably in comparison to last year, it has been inconsistent in subsequent quarters.

To know more about the company, check out its financial factsheet and latest quarterly results.

#2 Biocon

Next on the list is Biocon.

Biocon is the largest biopharmaceutical company in India. It specialises in the use of living organisms such as bacteria, yeast, and mammalian cells to produce drugs, in contrast to traditional pharmaceutical companies that rely on chemical syntheses.

As a leader in the biopharma segment, Biocon has reported a significant growth in business.

Its sales have doubled over the past five years. However, the company's profitability has been inconsistent, reporting a 5-year compound annual growth rate (CAGR) of 2.3%.

The 5-year average RoE and RoCE stands at 12.6% and 11.7%, respectively.

Biocon Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	6.95%	36.93%	14.83%	13.81%	14.53%
Operating Profit Margin (%)	25.07%	27.89%	28.01%	26.70%	26.67%
Net Profit Margin (%)	10.97%	18.18%	14.28%	11.85%	9.43%
Return on Capital Employed (%)	9.21%	16.12%	14.35%	10.56%	8.30%
Return on Equity (%)	9.17%	18.01%	14.26%	12.03%	9.83%

Source: Equitymaster

Despite growth in the business, Biocon has been losing popularity among FIIs of late. They have been divesting their stake since June 2022 resulting in a decline from 16.3% to 10.2% in March 2023.

Biocon has faced some serious challenges, including issues with the USFDA (Food and Drug Administration) and the exit of a prominent hedge fund.

The company has also been affected by increased raw material prices and supply chain constraints.

Currently, the stock trades at a PE of 48 times, a 14% discount to its 5-year median PE of 56 times.

To know more about the company, check out its financial factsheet and latest quarterly results.

#3 Jubilant Foodworks

Third on the list is Jubilant Foodworks.

Jubilant Foodworks houses two strong international brands, Domino's Pizza and Dunkin' Donuts, It's part of the Jubilant Bhartia Group.

The company enjoys exclusive rights to develop and operate Domino's Pizza Restaurants across India, making it the largest franchisee of Domino's outside the USA. It also has exclusive brand rights for Sri Lanka, Bangladesh, and Nepal.

Jubilant Foodworks has been expanding its network, with store count increasing from 1,396 in March 2021 to 1,623 in March 2022. This expansion has contributed to its overall growth.

Over the past five years, the company has witnessed a steady revenue growth rate of 11.2% and a net profit growth rate of 48.6%.

Jubilant Foodworks Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	17.06%	18.71%	10.70%	-15.31%	31.09%
Operating Profit Margin (%)	15.34%	18.16%	24.07%	25.49%	26.16%
Net Profit Margin (%)	6.50%	8.92%	7.10%	6.96%	9.51%
Return on Capital Employed (%)	34.19%	43.97%	47.70%	36.79%	42.35%
Return on Equity (%)	22.34%	28.66%	23.51%	18.18%	24.92%

Source: Equitymaster

The company has reported a respectable 5-year average RoE of 23.5% and RoCE of 41%.

Despite the strong performance, the stock's appeal has diminished among FIIs, as visible in the consistent fall in FII holdings. FIIs' stake has dropped from 29.8% in June 2022 to 25.4% in March 2023.

The company's quarterly business performance has been below expectations, primarily due to the impact of new store openings and increased costs. These factors have affected its profitability.

At present, Jubilant Foodworks trades at a PE of 92.4 times, a 10% premium to its 5-year median PE of 84 times.

To know more about the company, check out its financial factsheet and latest quarterly results.

#4 Voltas

Fourth on the list is Voltas.

Voltas, a household name, offers engineering solutions primarily in the air-conditioning market.

Apart from catering to the retail market with its branded cooling products like air-conditioners and refrigerators, it offers MEP (mechanical, electrical, and plumbing) services, and supplies engineering equipment.

A large chunk of the business (85%) stems from India, while the balance 15% comes from the rest of the world.

Voltas's robust distribution network and brand resilience sets it apart from its peers. However, the competitive environment, in tandem with subdued demand, has dented profitability in the past few years.

While sales have grown at a 5-year CAGR of 8.1%, the net profit has remained rangebound.

Voltas Financial Snapshot (2018-2022)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	11.11%	7.76%	-1.83%	4.89%	19.00%
Operating Profit Margin (%)	11.20%	11.98%	10.99%	10.97%	7.80%
Net Profit Margin (%)	7.21%	6.80%	7.00%	6.38%	1.43%
Return on Capital Employed (%)	16.77%	17.16%	15.08%	13.01%	5.63%
Return on Equity (%)	12.82%	12.42%	11.40%	9.64%	2.49%

Source: Equitymaster

FIIs have been selling their stake in the stock consistently since March 2022. From 26% in March 2022, the total FII holding dropped to 20.6% in March 2023.

The stock is available at a PE multiple of 108 times, nearly twice its median PE of 58 times.

To know more about the company, check out its financial fact sheet and quarterly results.

#5 HPCL

Last on the list is Hindustan Petroleum Corporation Limited (HPCL).

HPCL is India's third-largest refining and marketing company.

As a state-owned enterprise, it operates two major refineries in Mumbai and Visakhapatnam. These refineries command a combined capacity of over 16.8 million metric tonnes per annum.

The company offers an array of products, including petrol, diesel, liquefied petroleum gas (LPG), aviation turbine fuel, lubricants, and petrochemicals.

HPCL's strong leadership position has been instrumental in driving the company's rapid expansion. However, the high input costs and consequent depressed marketing margins continue to impact profitability.

While its revenue has grown at a 5-year CAGR of 11.8%, the net profit has registered a degrowth of 2.3%.

HPCL Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	17.04%	25.27%	-2.23%	-12.88%	49.37%
Operating Profit Margin (%)	4.97%	4.33%	2.53%	6.84%	3.37%
Net Profit Margin (%)	2.93%	2.23%	0.91%	3.91%	1.94%
Return on Capital Employed (%)	23.66%	20.41%	3.76%	19.72%	12.28%
Return on Equity (%)	30.98%	23.92%	8.60%	30.88%	18.35%

Source: Equitymaster

FIIs have been losing interest in the stock, as reflected by the decreasing FII holding reported by the company. It has come down from 18.2% in the quarter ending June 2022 to 14.4% in March 2023.

The company reported a major loss in 2 out of the 3 quarters of the financial year 2023. This came on the back of exceptionally high input costs and margin erosion on motor fuels and liquified petroleum gas (LPG).

However, the last quarter did indicate some respite in terms of improved profitability.

At present, the stock is trading at a price to book value of 1.2 times, a premium of 9% to its 5-year median of 1.1 times.

To know more about the company, check out its financial factsheet and latest financial results.

Snapshot of Stocks in which FIIs have been Decreasing Stake for 4 Consecutive Quarters on Equitymaster's Stock Screener

Here's a quick view of the above companies based on their financials.

Please note that these parameters can be changed according to your selection criteria.

This will help you identify and eliminate stocks not meeting your requirements and emphasise those stocks well inside the metrics.

Hanpy investing!

Conclusion

It's always interesting to see what FIIs are doing with their money. Considering all their research and resources, they have a lot at stake.

Although replicating FII trades may not guarantee the same level of success, understanding their movements can be enlightening for individual investors.

Observing their actions can provide a sense of the broader market sentiment, potential sector trends, and investment opportunities.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...