India-backed growth stories

The risks for companies witnessing an increase in holdings by domestic institutions on the back of consistently robust performance are lower than those backed by foreign investors

Local equity markets scaled up impressively over the last few weeks. The Nifty50 index broke above the 26,000-mark, ending the September 2024 quarter with gains of around 7%. The Nifty recorded the sixth straight quarterly gain, the longest winning streak in three years.

Sentiments turned choppy at the start of October as the global geopolitical scenario took centerstage following the escalating conflict in Middle East. World equities turned nervous and WTI crude oil futures soared above US$74 per barrel, marking their highest level in four weeks. The Middle East turmoil fueled supply fears, especially after US President Biden avoided condemning potential Israeli strikes on Iran’s oil facilities. This led to some volatility in local stocks. The Nifty50 eased under the 26,000- mark.

A spike in global volatility could weigh on sentiments in the near term, keeping inflows from overseas investors in check. FII flows have been moderate this year. The net FII inflows stood at Rs 2.08 lakh crore in FY2024, according to data from NSDL. This was the highest inflow since Rs 2.74 lakh crore in FY2021. The inflow in the six months of the current fiscal stood at just Rs 62000 crore. However, investments from local investors have made up largely for this moderation in overseas inflows in recent months.

Mutual fund inflows have been soaring in the post pandemic period. Open-ended equity mutual fund inflows jumped 3% to Rs 38,239.16 crore in the year to August on heavy demand for small-cap and mid-cap funds, according to the data released by the Association of Mutual Funds of India (AMFI), the industry trade body for mutual funds. The net assets under management (AUM) of the mutual fund industry hit the Rs 65 lakh crore level for the first time in August2024, up 41% from August 2023, as inflows into open-ended equity funds remained in the positive zone for the 42nd month in a row. SIPs’ contribution to mutual funds hit at an all-time high at Rs 23,547.34 crore. The number of SIP accounts stood at the highest ever at 9,61,36,329 in August 2024 as compared to 9,33,96,174 in July 2024.

In fact, FY2024 turned out to be one of the best years for the domestic mutual funds industry as AUM spurted nearly Rs 14 lakh crore to a record Rs 53.40 lakh crore as of March 2024 from Rs 39.42 lakh crore as of March 2023. At over 35%, the percentage gain was the highest since FY2021, when the industry had grown 41%. Equity-oriented mutual fund categories grew 55% to Rs 23.50 lakh crore in FY 2024, led by strong inflows and mark to market gains. The category saw net inflows of Rs 1.84 lakh crore in the fiscal, up from Rs 1.47 lakh crore in the previous fiscal. The net inflows through SIPs stood at nearly Rs 2 lakh crore versus Rs 1.55 lakh crore in FY 2023.

Mutual funds, thus, have become a preferred mode of savings for Indians. Households saved a smaller portion of their income in FY2023 as compared to the previous year, with the net financial savings dropped to a five-year low of Rs 14.16 lakh crore, according to Ministry of Statistics and Program Implementation or MoSPI data. MOSPI data showed net financial savings of households falling around Rs 9 lakh crore between FY2021 and FY2023. However, there was a rise in investments in various financial instruments like mutual funds, stocks (direct equities), bank deposits, and life insurance.

Our Team looked at fundamentally strong counters, with a market capitalization of more than Rs 500 crore. The focus was on businesses reporting an increase in net sales, net profit and operating profit for the last three trailing twelve months (TTM). This effectively means companies witnessing a rise in all these three parameters, starting from TTM ended June 2022 to TTM ended June 2024. The exercise provided a list of 470 counters. Businesses witnessing an increase in MF holdings in the quarter ended June 2024 over the quarter ended June 2023 and over the quarter ended June 2022 were selected, leading to a count of 110 businesses.

Outlook

While the overseas investment inflows have been moderate in the current fiscal as compared to last year, a sharp cut in interest rates by the US Federal Reserve in September 2024 can support the overall global liquidity and support emerging market equities. This will keep the broad momentum supported and keep sound stocks in focus. Companies witnessing an increase in MF holdings over last two years and reporting sustained increase in net sales, net profit as well as operating profit offer a good set of businesses in such a scenario. It makes sense to focus on these counters given the rocky start to the October quarter and cautious undertone in global markets owing to geopolitical worries.

With the September 2024 quarter earnings season getting underway, businesses proving themselves over the last two years in terms of increase in revenues and profits and preferred by mutual funds could continue to hog the limelight as they have a lower chance of a pullout by domestic institutions, and adversely impacting their valuations, as compared with those with an increasing trend of investment by overseas investors.