FMCG best performer for FPIs in FY23, IT cos least preferred

Driven by net investment of ₹15,561 crore by FPIs, shares of leading consumer goods companies such as Hindustan Unilever, Nestle and Colgate-Palmolive rose in FY23, boosting the S&P BSE FMCG index by 23.64% during the year. However, analysts remain divided on the prospects of the defensive sector in the current fiscal year (FY24) while remaining upbeat on the financial sector.

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Others which gave robust returns to FPIs in FY23 were financials, led by banking, which pushed up value of their outstanding holdings by about ₹1.3 trillion, and auto and auto ancillaries, which increased holding value by ₹0.7 trillion.

IT, worst performer, witnessed value of assets fall by ₹1.23 trillion in FY23, followed by oil and gas ( ₹0.8 trillion) and realty by ₹0.09 trillion, following selling in these sectors.

FPIs sold shares worth $5.1 billion in FY23, as the market gyrated 24% between a low of 15183.4 in June 2022 and a record high of 18887.6 in December amid global interest rate hikes and the war in Ukraine. The selling was matched by domestic institutions buying at lower levels, which acted as a floor for markets. From the 1 December record, the market tanked 11% to 16828.35 on 20 March, making India underperform other emerging markets and developed markets, which bore the brunt of higher rate hikes last year. The opening up of China was one of the key reasons for FPI outflows from India due to overvaluation concerns.

This is evident from global index provider MSCI’s data, which showed that MSCI India Index generated gross returns of negative 6.29% in the year through March 2023 against 4.02% positive return by MSCI Emerging Markets over the same period.

From a low of 16828.35, the market pulled back to near 17,600 through Thursday as FPIs bought in March and April, besides trimming derivatives short positions. Capital goods, construction and construction material sectors attracted FPIs in the last fortnight of March.

Analysts remain divided on defensive stocks’ continued allure, but are unanimous on the prospects for banking, thanks to strong balance sheets and steady loan growth.

“Volatility meant that defensives like FMCG became best performer for FPIs in FY23,” said Rajesh Palviya, vice-president (research – technicals and derivatives) at Axis Securities.

However, Shrikant Chouhan, research head (retail) at Kotak Securities, expects “uncertainty over monsoon” to prick the FMCG bubble and be a drag on autos, on concerns that rural demand might decline. He expects continued “outperformance by banks” on balance sheet strength and loan growth potential and IT underperformance to continue for another quarter as US stares at a rate hike-induced recession, which could crimp IT spends by companies there.

He says oil and gas could attract short-term inflows as oil prices gain from an Opec+ output cut effective next month. The shift from defensive to high-beta stocks by FPIs will happen once clarity emerges on the rate hike cycle.

Palviya, who expects defensives’ outperformance to continue, is bullish on HUL, Colgate Palmolive, Nestle and IndiaMart in the FMCG space, which he expects to attract FPI flows. In pharma, he expects Aurobindo Pharma, Sun Pharma, Abbott India and Cipla to attract institutional inflows.

Banking stocks like ICICI Bank, Axis Bank, Canara Bank and State Bank of India with potential of 20% upside over a year are among Chouhan’s favourites, while Infosys, HCL Tech and Tech Mahindra could be good value buys offering potential 15% returns after a quarter of underperformance.