Whalesbook
FIIs Shift Strategy in India
Foreign investors are significantly changing how they hold Indian stocks, moving from broad market investments to a more selective, sector-specific strategy. This shift comes as overall FII ownership in Indian equities nears decade lows. Investors are seeking companies with strong earnings and global appeal, a trend that domestic investors are helping to balance by steadily buying.
Selective Sector Focus for Foreign Investors
Analysis shows that while FIIs have sold stakes in many companies, their funds have selectively flowed into promising sectors. Telecom and capital goods have been primary beneficiaries, attracting about $2.91 billion and $2.89 billion respectively. Metals also saw positive inflows totaling $2.25 billion. This contrasts with significant outflows from banking, consumer, and technology stocks. Companies like Bharti Airtel, GE Vernova T&D, Adani Ports, and Hindalco Industries have seen increased FII ownership.
Domestic Investors Provide Support
Despite the overall FII selling, Domestic Institutional Investors (DIIs) have steadily increased their holdings in most Indian stocks where FIIs divested. This strong DII demand has softened the impact of foreign selling, keeping leading Indian stocks supported. For example, Bharti Airtel, a favoured stock, saw its FII holding rise to 28.8% from 22.7%, and GE Vernova T&D saw FII ownership jump to 18.5% from 0.7%.
Drivers Behind Sector Shifts
Government spending plans of ₹12.2 lakh crore for FY 2026-27 are boosting capital goods and infrastructure, driving demand for projects requiring steel. India's steel market is unique globally, projected to grow at nearly 6% annually until 2034, with domestic demand absorbing most new supply. Global steel demand, however, is expected to grow only by 0.3% in 2026, partly due to China slowing growth. Meanwhile, the IT services market is forecast to reach $1.87 trillion by 2026, fueled by AI adoption and cloud expansion, with a move towards higher-value AI services expected. The telecom sector remains a growth driver; Bharti Airtel, for instance, is projected to achieve 46% annual earnings per share growth between 2023 and 2026.
Company Performance and Analyst Views
Bharti Airtel trades at a P/E of 31-36 with a market cap near ₹10.54 trillion, supported by its growth prospects. Adani Ports has a market cap of ₹4.07 trillion and a P/E of 30-32; analysts largely recommend buying, with price targets suggesting about 10-11% upside. Hindalco Industries operates in the metals sector, driven by domestic demand despite global challenges. JSW Steel faces mixed analyst views, with ratings ranging from 'Moderate Buy' to potential downside, and price targets from INR 975 to INR 1,601, showing uncertainty. Axis Bank, rated a 'Strong Buy' by many, shows strong loan growth but faces margin pressure; its price targets vary widely, implying significant potential upside. KPIT Technologies generally receives positive ratings, but analysts see a wide range of price targets, with potential upside from 13% to 54%. However, KPIT has seen falling margins recently. One 97 Communications (Paytm) trades at a high P/E ratio (over 100) and has shown a negative return on equity for three years, raising valuation concerns and pointing to business struggles.
Persistent Risks Remain
However, risks remain even with this sector rotation. The telecom sector, despite growth, faces regulatory uncertainties and intense competition. Metals producers could be hurt by global demand slowdowns, especially from China, and fluctuating raw material prices. While India's steel sector is strong domestically, global trade policy shifts and potential overcapacity abroad could pose challenges. Financial companies could see net interest margins squeezed as interest rates fall, affecting profits. IT firms, despite strong demand for AI and cloud services, face margin pressures from increasing costs and the need to move to higher-value services. KPIT Technologies, for example, has reported falling EBIT margins recently.
Market Outlook
Analysts remain positive on key companies like Adani Ports, with many 'Buy' ratings and attractive price targets. Axis Bank also holds a 'Strong Buy' consensus, showing institutional confidence in its growth path. For sectors like IT and Metals, analysts have differing views, citing potential margin pressures and sector challenges despite clear growth drivers. The outlook suggests foreign capital will continue to be selective, favoring companies with strong earnings and competitive edges.