INDIA DAILY May 22, 2014 India 21-May 1-day1-mo 3-mo Sensex 24,298 (0.3) 6.7 17.4 Nifty 7,253 (0.3) 6.4 17.8 Contents Global/Regional indices Special Reports Dow Jones 16,533 1.0 0.5 2.7 Nasdaq Composite 4,132 0.8 0.2 (3.1) Strategy FTSE 6,821 0.3 3.0 (0.2) Strategy: Hot or sticky - dissecting the foreign investment influx into India for Nikkei 14,171 0.9 (1.5) (4.7) answers Hang Seng 22,837 0.0 0.5 1.2 KOSPI 2,013 0.2 0.4 2.8 Theme Report Value traded – India Banks/Financial Institutions: Day 1 takeaways from Chasing Growth - Cash (NSE+BSE) 272 210 176 Financial Services conference Derivatives (NSE) 1,762 1,951 1,608 Daily Alerts Deri. open interest 2,231 1,752 1,530 Results Zee Entertainment Enterprises: Weak results and outlook Forex/money market Change, basis points Sector 21-May 1-day 1-mo 3-mo Telecom: India wireless 4QFY14 round-up - volumes rebound well, mixed bag Rs/US$ 58.6 0 (227) (321) on RPM 10yr govt bond, % 9.0 (6) (27) (18) Net investment (US$mn) 20-May MTD CYTD FIIs 3 2,351 7,647 MFs (90) (197) (1,918) Top movers Change, % Best performers 21-May 1-day 1-mo 3-mo IVRC IN Equity 28.9 8.9 79.8 159.9 HDIL IN Equity 92.4 (1.2) 29.1 123.5 UT IN Equity 26.1 (0.6) 54.9 111.3 ADE IN Equity 515.4 (3.3) 17.1 106.5 IHFL IN Equity 395.1 8.7 38.4 105.9 Worst performers FTECH IN Equity 232.2 (3.7) (33.6) (28.7) DRRD IN Equity 2300.1 (1.0) (9.9) (15.9) INFO IN Equity 3157.1 1.1 0.2 (15.8) GLXO IN Equity 2549.6 1.0 2.7 (15.8) WPRO IN Equity 493.1 (0.3) (7.1) (13.7) Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. Strategy.dot INDIA Strategy India Quantitative MAY 22, 2014 UPDATE BSE-30: 24,298 Hot or sticky—dissecting the foreign investment influx into India for answers. We categorize foreign investment activity into various types of market participants so as to gauge the investment horizon of the recent inflow of foreign capital. Sector-wise foreign investment classification shows that financials and energy attracted more than 50% of the foreign investments as sector rotation from defensives to cyclical stocks is underway. QUICK NUMBERS Categorizing foreign investment activity—investment advisors overshadow stickier investors • Investment advisors India has attracted foreign inflows worth US$15.9 bn since September 2013 with more than constitute 50% of US$7 bn being pumped into equities in the course of the past three months alone (see Exhibit 1). the FII participation In order to understand the risk profile and investment horizon of the recent foreign equity in CYTD14 investments, we segregated these flows into various categories of market participants (see Exhibit 2). While CY2013 witnessed larger participation from long-term investors like sovereign wealth • SWF and PF funds (SWF) and pension funds (PF), investment advisors and managers have constituted more participation has than 50% of the foreign equity inflows since September 2013. Loosely regulated categories like dropped to ~18% broad-based funds have also increased their participation over the past three months. over the past three months A closer look at investment managers and advisors—volatile investment trend in recent times Exhibit 3 showcases the volatile investment trend foreign investment advisors and managers have • Financials attract exhibited over the past two years. The investment horizon for the category has been erratic amid more than 40% of capital remigration from emerging markets to developed markets considering their regional focus. FII inflows in The infamous ETFs are also classified under the following category. While investment managers CYTD14 and advisors were net sellers worth `286 bn (~US$5 bn) between January 2013 and August 2013, they have aggressively changed gear, cumulatively pumping `477 bn into the equity markets • PSU banks could (~US$8 bn) since then. soon be inaccessible for FIIs SWF and PF participation—drops from 35% in August 2013 to 18% over the past three months Long-term investors like pension funds (PF) and sovereign wealth funds (SWF) were actively buying Indian equities in CY2013. In the period between January 2013 and August 2013, these two categories have cumulatively purchased Indian equities worth `300 bn (~US$5 bn) even as investment advisors and managers were selling out of the region (see Exhibit 4). The transition to the FPI regime has resulted in reclassification of assets across investor categories thereby distorting (exaggerating) SWF and PF activity for December 2013 (see Exhibit 5). Considering ~35% cumulative participation by SWF (13%) and PF (22%) in the January-August 2013 period, foreign investments by these categories have dropped substantially over the past three months (18%) with investment managers and other broad-based funds taking up the charge. Saifullah Rais [email protected] Mumbai: +91-22-4336-0895 Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000 For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Strategy India Sector-wise FII inflows—PSU banks could soon become inaccessible Exhibit 6 showcases the sectors attracting foreign equity investments in recent times. In CYTD14, more than 40% of the net FII inflows are being directed towards financials with the energy sector (16%) coming in a distant second. It is evident that sector rotation from defensives to cyclical stocks is underway in CYTD14 with FII selling witnessed in sectors like healthcare and information technology in favor of energy and financials. The revived foreign interest in the banking space may hit a regulatory hurdle considering five out of the 12 CNX Bank Nifty constituents are already in RBI’s FII restricted list (see Exhibit 7). The PSU constituents of the CNX Bank Nifty may soon become inaccessible for foreign investors with only ~US$4 bn of foreign headroom available (as on March 31, 2014). Since then, the banking space (excluding NBFCs) has witnessed another US$0.36 bn of foreign investments in April 2014 taking the three-month tally to US$1.8 bn. At the current pace of FII inflows, the available foreign headroom could be fully utilized over the course of the next few months. Exhibit 1: FIIs have already invested US$7.4 bn in CYTD14 FII flows in equity segment, calendar year-ends, 2000-14 (US$ bn) 40 29.3 30 24.5 20.0 20 17.3 17.6 10.8 8.4 8.6 10 6.7 7.4 3.7 2.1 1.5 2.8 0.8 (0.0) 0.4 1.2 0 (0.5) Jan Feb Apr Mar May (10) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (13.3) (20) Source: Bloomberg, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy Exhibit 2: Largest deployments seen by investment advisors and managers; loosely regulated broad-based funds also active Composition of estimated market participation based on SEBI-declared FII AUC data, end-April 2014 AUC Segregated flows (Rs bn) (a) Market participation (%) Type (US$ bn) 1-mo 3-mo CYTD14 1-mo 3-mo CYTD14 Mutual Fund II 108 (44) (21) (10) (60) (6) (3) Others (broad based fund/portfolio) II 39 33 48 19 46 14 6 Sovereign Wealth Fund I 20 5 14 40 7 4 12 Pension Fund II 20 20 41 57 28 12 17 Investment Manager/Advisor II 20 86 209 170 118 62 51 Investment Trust II 16 (6) 17 22 (8) 5 7 Asset Management Company II 4 (2) 18 23 (3) 5 7 Broad Based Fund II 3 (3) 0 7 (4) 0 2 Bank II 3 (1) 17 19 (2) 5 6 Insurance/Reinsurance Company II 2 0 1 2 1 0 1 Foreign Governmental Agency I 1.4 (3) (3) (6) (4) (1) (2) Endowment III 0.6 (1) (2) (3) (1) (1) (1) Foreign Corporate III 0.6 5 6 4 7 2 1 Central Bank I 0.6 (1) 0 2 (1) 0 1 Charitable Trust III 0.6 0 2 4 0 1 1 Trustee of a Trust III 0.1 (17) (14) (15) (24) (4) (5) University Fund II 0.2 0 1 1 1 0 0 Insurance II 0.2 (0) (0) (1) (0) (0) (0) SEBI FII inflows (Rs bn) 73 336 335 100 100 100 SEBI FII inflows (US$ mn) 1,211 5,309 5,297 Notes: (a) Flow segregation is estimated based on AUC appreciation normalized MoM for market performance. (b) We normalized asset appreciation by BSE-200 index price movement. (c) Estimation error is distributed across market participants based on asset value. (d) Latest data as of end-April 2014. Source: SEBI, Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India Exhibit 3: Investment advisors sold ~US$5 bn of Indian equities between January 2013 and August 2013 Net foreign equity inflows by investment managers, 2013-current Total FII (Rs bn) Investment managers/advisors (Rs bn) 300 250 200 150 100 50 0 (50) (100) (150) Jul-13 Jan-13 Jun-13 Jan-14 Feb-13 Apr-13 Oct-13 Feb-14 Apr-14 Sep-13 Nov-13 Dec-13 Aug-13 Mar-13 Mar-14 May-13 Notes: (a) Flow segregation is estimated based on AUC appreciation normalized MoM for market performance.