FIIs cut exposure to State Bank, Reliance in June quarter

With both the State Bank of India (SBI) and Reliance Industries (RIL) passing through a phase of uncertainty, foreign institutional investors have pared their holding in the two index heavyweights. The sharpest cut in FII holding is in SBI. In the June quarter, FIIs have dumped shares to cut their holding by 2% to 10.9% from 12.9% in March quarter. The two scrips make up for over 15% of the benchmark BSE Sensex value.

Overall, FIIs have marginally increased their holding in 17 out of 29 Sensex shares. They have raised their holding marginally in scrips like Larsen & Toubro, Hindustan Unilever, Infosys, TCS and HDFC Bank. The trend appears to be to back high performers.

Hence, if the holding is up in L&T, it is down in Jaiprakash Associates. FIIs have shown a clear preference for Hero Honda over Bajaj Auto.

SBI announced lower earnings on the back of additional provisioning for pension and potential risk loans. The stock market expects SBI to continue making a higher provision. At the same time, the bank has been talking about raising equity to the tune of over Rs 20,000 crore through a rights issue.

Although this is necessary, it could lead to substantial dilution of equity in the short term. According to Bank of America-Merrill Lynch, the State Bank of India trades at an average price to book value of 1.8. However, the current price to book value is 2. However, the foreign securities firm expects the bank to report a strong return on equity by March 2012.

In the case of Reliance Industries, expectations have faded. This is clearly reflected in the forward price-earnings multiple of just under 12 at which the share price is trading. The average forward PE ratio of Reliance has been over 17. This indicates the market does not expect dramatic high profit performances from RIL anymore. Traditionally, Reliance has delivered an operating profit margin of over 16.5%. However, currently it is at 14.4%. BoA-Merrill Lynch expects the company to maintain it at the same level by March 2012.

However, with the RIL-BP deal getting clearance from the government, things could look different in the second half of the financial year.

FIIs are likely to take a positive cue from a slew of government announcements. The decision of committee of secretaries to allow foreign direct investment of up to 51% in multi-brand retail, uniform one market telecom licence in the soon-to-be announced new telecom policy and the possibility of raising electricity prices for consumers would play positively on the investor sentiment.

The government has also hiked fuel prices, cleared nine coal blocks and increased FDI limits in FM radio. All this is likely to add up to create a better investment climate.

FIIs have invested $2.1 billion in 2011 so far. In the first half of this year, the net FII inflows are only $900 million. This is a fraction in comparison to the first half of 2010, when these investors injected $7 billion.

To see FII holdings in companies look at the table below