DIIs increase stake in metals, public sector banks in Q4: Report

Stalling their eight-month selling spree, domestic institutional investors (DIIs) have turned net buyers in March and April 2021 to counter offloading of shares by foreign investors amid the second wave of Covid-19.

While DIIs sold equities worth Rs 1.42 trillion between July 2020 and February 2021, they bought shares worth Rs 18,248.85 crore between March and May 10, 2021, BSE data shows. In comparison, FIIs bought shares worth Rs 1.82 trillion between October 2020 and March 2021 but have sold shares worth Rs 17,647.99 crore in April and May (so far).

Yet, DII shareholding hit seven-quarter low at the end of Q4FY21 after they witnessed an outflow of $3.2 billion as against FIIs inflow of $7.3 billion during this period. DII holdings in the Nifty500 were down 10 basis point (bp) QoQ and 50bp YoY to 14.2 per cent relative to FII holdings at 22.3 per cent (down 20bp QoQ but up 160bp YoY).

Data analysed by Motilal Oswal Financial Services show that DIIs pruned their stake in Utilities sector by 120bp, Consumer Durables (90bp), Capital Goods (50bp), and Telecom (50bp) in Q4 on a sequential basis while increased stake in Consumer (30bp), Healthcare (20bp), and PSU Banks (20bp).

Using the Nifty500 as the benchmark, DIIs are now significantly overweight in Metals, PSU Banks, Capital Goods, Consumer, and Utilities and underweight in NBFCs, Private Banks, and Technology. Overall, the top-5 sectoral holdings of DIIs in the Nifty500 account for 66 per cent of the total allocations – BFSI (27.8 per cent), Technology (11.5 per cent), Consumer (10.7 per cent), Oil and Gas (9.8 per cent), and Auto (6.2 per cent).

The move, analysts say, reflects DIIs’ cautious stance as some sectors where they have back-stepped are going to be directly impacted by Covid-19. That said, the move to pick PSBs over private banks seems myopic to some.

According to Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services, reducing weightage on private banks and increasing on PSU banks is unlikely to pay-off in the medium to long run since private sector banks are well equipped to garner market share from PSU banks.

Returns at the bourses too suggest mixed reward to DIIs. In three months to March, the Nifty PSU Bank index was the best performing index on the NSE, up 23 per cent, while the Nifty Pharma index was the top laggard, down 5 per cent. Sectors where FIIs reduced stake, IT and Auto for instance, gained 6.6 per cent and 7.5 per cent, respectively during the period, ACE Equity data show.

However, since April, the Nifty Metal, Pharma and PSE indices have outperformed the Nifty50 and Nifty500 indices by rallying between 10 per cent and 38 per cent. In comparison, the 50 and 500-share indices have gained 2 per cent and 3 per cent, respectively.

Cues for retail investors

While Vijayakumar suggests retail investors need not read much into DII allocation, he nonetheless advises investors to look at the healthcare sector which is likely to do well for the next couple of years and therefore it “makes sense to remain invested in this segment despite high valuations”.

“Retail investors can buy private insurers for long-term. Besides, leading private sector banks and the leading housing finance companies are good. Leaders in the IT space can also be looked at as the sector has good earnings visibility for the next 2 to 3 years,” he says.

Gaurav Garg, head of research at CapitalVia Global too opines that retail investors should remain cautious and pick stocks predominantly from mid- and small-cap space.

Vijayakumar adds that the broader market space is a minefield and, therefore, retail investors should invest in this segment indirectly through the mutual fund route.