Cutting loose: FIIs turn pessimistic on PSU banks, capex revival

Foreign institutional investors (FIIs) are seeing little value in state-owned banks and capital goods companies. The shareholding pattern for the December quarter of BSE-500 companies shows that FIIs have pared stake in a dozen state-owned banks listed on the exchanges.
 
FIIs also don’t seem to be buying the capex cycle revival story as they have cut stake in at least 17 capital goods companies.
 
Their bearish stance on PSU banks and the capital goods sector seems to be in contrast with the domestic mutual fund’s (MF’s) outlook on these segments. While FIIs have cut stake in 17 of the 26 capital goods firms, MFs have raised stake in 16 such companies. Also, MFs have raised stake in 10 of the 13 PSU banks, whereas FIIs have trimmed their stake in 12 PSU banks, shows data analysed by Capitaline.
 
Surprisingly, the PSU banks where FIIs have taken the largest cut in their stake are State Bank of India (SBI) and Bank of Baroda (BoB). Analysts tracking the sector consider the two banks relatively better-placed among PSU banks. FII stake in BoB is down 97 basis points (bps) from the previous quarter while FIIs stake in SBI is down 84 bps. In contrast, MFs’ stake has seen the largest jump in BoB (134 bps) and SBI (96 bps).
 
While the ongoing resolution process under the Insolvency and Bankruptcy Code or IBC and signs of growth recovery are positives, analysts say PSU banks are likely to see a tougher road to recovery.

 
“While growth is returning to the banking system along with some signs of pricing power, asset quality pressures are not completely behind us and credit costs are likely to remain elevated. This will exert pressure on the return on assets (ROAs), especially for PSU banks,” said analysts at ICICI Securities in a note.
 
PSU banks have ceded market share to their private peers over the years, and this has dampened investor sentiment.  For example, in case of micro-small and medium-enterprises segment, private banks’ market share has risen from 26.4 per cent to 32.6 per cent over Q2FY17-Q2FY19, while PSU banks’ share declined by over 10 per cent — from 58.6 per cent to 48.1 per cent — over the same period, said analysts.
 

The fact that 11 of the 21 public sector banks (PSBs) are under the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework doesn’t augur well for the PSU banks’ future growth. The PCA framework imposes lending restrictions and prevents these banks from expanding.
 
In capital goods, companies where FII stake has seen the sharpest cut include KEC International (211 bps) Siemens (184 bps) and Cummins India (103 bps). Engineering and construction giant Larsen and Toubro has seen FIIs cut their stake to 18.78 per cent in the December quarter from 18.93 per cent in the previous quarter.
 
According to analysts, the sluggish capex cycle continues to be an area of concern. “We expect subdued ordering activity owing to negligible private sector capex and delay in finalising large projects before the general elections. With delayed capex cycle, which is expected to pick up gradually, capacity oversupply in some areas and increased competition are key concerns for the sector,” said analysts at Reliance Securities in a note.