Share prices of Indian companies seem to get a boost from the amount of FII money being pumped in. An extensive research done recently by CNI Research Ltd, a BSE (^BSESN : 11403.25 0
)-listed research organisation, on 394 companies which have seen increased FII holding has found that there is a strong co-relation between FIIs' stake and share price movement.
Scrips of 44% companies where FII raised stakes showed a significant rise, compared to 29% where their holding was below 5% and 23% where their holding was above 5% after selling.
The study was conducted when the stock markets were on a continuous downward spiral for the entire fourth quarter after the fantastic rally in December 2008. Of the 394 companies studied, FIIs' stake dropped below 5% in 121 while 164 companies saw FIIs selling but the holding was still above 5%, and in 109 companies FIIs increased their stake.
"This study should act as precursor for investors to decide on stocks they should be investing in. Share prices of companies in which FIIs were raising stakes have a greater probability of seeing a rise as against others. The drop in scrips of 56% of the companies where FII stake went up was purely on account of period discrimination. The market trend reversal started from March 17, and the effect of the buying in these companies was not reflected in the share prices due to lesser timespan," said CNI Research CMD Kishor P Ostwal.
The analysis also suggests that the prices have shown a downward trend in companies in which FII holdings have dropped. The drop is 71% in cases where the FII holding has come down below 5% and 77% in cases which saw selling but the holding was above 5%.
"The former represents a safe zone for investors as there is very little left with FIIs for selling and hence the price reversal will be sharp and very soon. This will help investors interested in bottom fishing", Ostwal added.
The only segment which poses a high risk is where FII holding is still above 5%. While this may not hold true if the market itself goes up substantially, but if for any reason there is a trend reversal and the markets start correcting, this segment faces the maximum risk as any negative outlook could mean fresh FII selling to generate cash, he said.
Thus, the study concludes that investors in companies which are in strong sectors and with visible growth, and those which have seen a steady rise in FIIs holding, should go all out. The bottom fishing should be done in the category where FIIs holding is below 5% or almost nil, eg. Century Textiles, Bombay Dyeing, CCL Products all these stocks have shown marked recovery from its low prices on FII selling.