Redemption In The Second Quarter
Since 1994, when mutual funds were privatised, it was expected that institutional investors would become major players in the market and mobilise small savings to fund equity in corporate India. Most of the funds have published their quarterly portfolios for their second quarter and it is time to begin the ritual of looking for optimistic trends again.
In the bargain, if one is not completely convinced about investing in the funds, one may find trends in the portfolio changes of the funds to pick up some tips on stocks. So The Smart Investor decided to tabulate some quarterly portfolio data for the quarter ended June 1998.
The funds began in this quarter with the Sensex beginning its downward trudge. On March 31, 1998, it was trading at 3894 and at the end of the quarter, it had fallen about 17 per cent to 3250 points. The market has been falling mainly because of lower FII investments and uninspiring corporate results.
Many of the funds have not fallen with the market. This is because most of them are loaded with infotech stocks which did not take as severe a beating. Many of the infotech stocks also recovered even after they fell marginally because of the current government's thrust on this sector. For instance as much as 39 per cent of Birla Advantage's assets and about 36 per cent of Kothari Prima Plus's assets are currently parked in infotech stocks. Most of these funds which are anyway very small are also stocked with multinational FMCG (fast moving consumer goods) stocks or pharma stocks.
But the uncertainty in the market is very definitely reflected in the funds. They seem to be facing a definite redemption pressure. For instance ITC Top 200 whose net asset value (NAV) actually rose in the quarter had about 3.8 crore outstanding units at the end of the quarter as compared to about 4.02 crore units at the end of the previous quarter. Out of the four funds tabled here, only Templeton seems to be avoiding the pressure. The fund now actually has more units now than two quarters before. Even here, the increase this quarter is not significant.
Even at very low markets, and with funds having reasonable NAVs are not able to attract funds. This indicates a significant lack of investor confidence in the future. The Sensex has only continued its downslide since, pulling the NAVs of funds along with it. Our sample though is only indicative because several funds like the Birla Advantage Fund, the ICICI funds, the Tata funds and the Apple funds have not published their quarterly positions yet.
Fund managers' strategy this quarter seems to be just holding on to the existing portfolio in the same percentage of exposures while trying to encash some stocks to meet the redemption pressure. None of the funds have taken fresh positions in any new stock. Few have increased positions, but there are more sales than purchases. Many of the sales seem to be marginal reductions in positions to meet redemptions. For instance ITC Threadneedle Top 200 has disinvested 4000 shares in Infosys and 8500 shares in TVS Suzuki. But still has a large exposure in both those stocks. Similarly Alliance disinvested about 400 shares in Knoll Pharma and 5000 shares in Infosys but continues to have quite high exposures in both stocks.
The two stocks that have entered into many fund portfolios are _ Hindustan Petroleum (HPCL) and SmithKline Beecham Pharma. Hindustan Petroleum was trading at about Rs 459 in March and then fell to Rs 376.50 in June. Many funds seem to have picked up the stock as it fell with the market.
Smithkline Pharma is a defensive pharma sector stock which has brands like Iodex and a hepatitis Vaccine called Engerix-B. HPCL's net profit grew 14.52 per cent in 1997-98 to Rs 701 crore. In spite of the loss of production in the Vizag refinery, the company increased its sales from Rs 13,941 crore to Rs 14,382 crore. The company's stock which was around Rs 459 in March 1998 seems to have fallen with the market to Rs 376.50 in June and has since fallen further to Rs 277 now. But the market too has fallen further since June.
ITC Top 200 has reduced its position in Bharat Earth Movers, Reckitt & Colman of India and NIIT. The fund seems to have booked partial profits in NIIT because the stock rose from about Rs 900 in March to about Rs 1600 in the quarter.
The BEML stock has fallen from Rs 59 to Rs 23.90 and is on a falling trend. The company had a negative operating cash flow in March 1997 and is likely to worsen in March 1998. The defense ministry owns a large stake in the company and has refused to let it be disinvested.
Reckitt & Colman fell from Rs 388 to Rs 316 but is on a rising trend. The company's turnover increased but its net profits dropped. The company's two strong brands Dettol and Dispirin have been transferred to a JV and the financial implications are not clear. But this is a long term strategy (see: The Smart Investor dated August 10, 1998).
It has taken fresh positions in HPCL, MTNL, Cochin Refineries, HLL and SmithKline Beecham Pharmaceuticals. MTNL has posted good results for 1997-98 with a 15 per cent increase in net profits. The company is a monopoly and the sanctions will affect other upcoming projects which will benefit the company (See: Dial Now in The Smart Investor June 29, 1998). Cochin Refineries too seems to be a good investment at the current price of Rs 225.70 (See: Profit in the Pipeline in The Smart Investor dated May 18, 1998). Any deregulation in the refining sector will lead to a jump in margins. The stock rose from Rs 150 in March to Rs 268 in April and has now fallen to Rs 225. The other two stocks are defensive safe stocks.
Templeton has booked profits in several stocks like Siemens, TVS Suzuki and Cochin Refineries during the quarter. But several analysts are extremely bullish on TVS Suzuki (see The Smart Investor dated July 6, 1998). The fund has increased position in Bajaj Auto, Grasim, VSNL, Hindustan Petroleum and IPCL Grasim posted an increase in operating profit margins in spite of continued low price realisations in the first quarter. Templeton has been building its position in the stock.
The fund has increased its position in Bajaj Auto. This company has posted reasonably good first quarter results with a 12 per cent increase in sales and 14.79 per cent in net profit. The company has launched sleek new models and also a four stroke scooter. It will have further advantage since LML is caught in a bit of a bother over the joint venture with Piaggio.
It has also increased stake in Videsh Sanchar Nigam Limited (VSNL). VSNL posted a 78 per cent increase in profits in 1997-98 and its income from value added services grew 64 per cent. But one may have to be cautious of this stock yet for it is not clear how the measures recommended by the IT task force to open up the telecom infrastructure in the country is likely to impact the stock. The company's intention to build a high bandwidth backbone around the country is also mired in controversy.
DSP Merrill Lynch has reduced its positions in several stocks. But the strategy of the fund is not quite clear. The fund which is just a year old is changing its position in several stocks even though nothing fundamental has changed. For instance, it had picked up Floatglass but has been decreasing its position in the stock in the last two quarters. It has booked profits in Cochin Refineries. It increased stake in several stocks just last quarter but has disinvested this time. It is probably playing with these stocks in a band.
Alliance Capital has booked profits in Corporation Bank and has increased its position in Zee sizably. It already had a huge exposure to that stock. This is a stock which has spiralled in the last quarter and the recent announcement where it gets control of Star in India to make use of uplinking from the country strengthens the stock's position. It seems to be increasing its position in NIIT again after booking profits once earlier. The fund's pick of Hotel Leelaventure however in interesting because the stock which was at a low of Rs 41 has begun rising and is currently trading at Rs 51. But is rising at very high volumes over the last week.