Oil stocks catch fancy of foreign funds, scope for more

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SME Times News Bureau | 28 Aug, 2014
India's oil and gas industry figures among the most regulated ones and uncertainties continue over issues such as pricing but stocks of listed companies in this segment are increasingly finding favour with foreign funds, market data shows.

Not only that, there also appears to be scope for further investment into the stocks of such companies, notably Reliance Industries and to some extent even Oil and Natural Gas Corporation (ONGC), as they are yet to exhaust the permissible foreign fund holding cap.

"Reliance drives the under-owned on energy and ONGC is also marginally under-owned," said said the latest Investment Strategy report of Bank of America-Merrill Lynch, titled: "Positioning: Sensex FII ownership at all-time high".

The report further said Reliance Industries was also under-weight with respect to the domestic mutual funds investment and that it was positive on energy sector reforms in India.

"Similar to FIIs, software and energy are the largest sector for under-owned (stocks) for mutual funds. The under-weight on energy is largely driven by Reliance, similar to FIIs," it said.

"The top four under-owned stocks for both FIIs and domestic mutual funds are the same -- HDFC, Reliance, Tata Consultancy Services and Infosys, though not in the same order," said the Bank of America-Merrill Lynch report.

According to available data, out of the total market capitalisation of $160 billion of all oil sector stocks in mid-June, the amount still available for foreign funds to make additional investment was some $32 billion.

This, in otger words, still left room for additional buying of as much as 20 percent.

Collectively, the 20-percent amount available was also the highest among all segments of stocks listed on the Bombay Stock Exchange (BSE) 500 list. The closest next was telecom with 19.2 percent, followed by 17.9 percent for non-banking finance firms.

Private banks appeared heavily over-weight for foreign funds, with a few stocks left for additional holding -- leaving a scope for barely 3 percdnt, followed by 6.2 percent for cement and 8.1 percent for public sector banks.

But being under-weight did not mean foreign funds did not buy oil stocks.

In the quarter ended June 30, these funds bought stocks worth $666 billion of Reliance and $141 million of ONGC, whereas for Cairn India, another key stock in the segment, there was a net sale of $138 million, said the Bank of America-Merrill Lynch report.

A similar report, "Flowmeter: India Holdings and Flow" of leading brokerage Motilal Oswal said foreign funds recorded the highest inflows in the oil sector with inflows of $1 billion. The sector gave 18 percent return on quarter-on-quarter basis.

"The highest inflows by foreign institutional investors were in Reliance with USD 724 million, followed by ONGC with USD 138 million and GAIL India with GAIL USD 121," it said.

The variance in the calculation of foreign fund investments in the reports of Bank of America-Merrill Lynch and Motilal Oswal is on account of the differences in ascertaining the exchange rate and the average prices of the scrips under consideration.

Between December last year and June this year, the total foreign fund holding in the market capitalisation of Reliance had gone up by 1.65 percentage points, against a drop of 0.18 percentage points in ONGC and an increase of 0.57 percentage points for Cairn.

Hindustan Petroleum, with which Reliance is said to be in talks to retail petroleum fuels, as also Bharat Petroleum, both registered an increase in foreign fund holding, while Essar logged a decline.

Overall, foreign funds' holding in the 30 scrips that go into the sensitive index of the Bombay Stock Exchange was at all-time high of 22.5 percent of market capitalisation and around 45 percent of the free-floating stocks in the quarter ended June.

In the case of Reliance, the holdings of foreign funds was the highest in the June quarter since September 2007, when the stake held stood at 20.64 percent, even as the all-time high was around 23 percent in December 2004.