When you invest in mutual funds, you are indirectly investing in stocks. So, we decided to ?nd out which are the stocks most mutual funds in the equity-linked savings scheme, ?exi-cap, multi-cap and large-and-mid-cap categories invest in. We analysed 149 funds that have a broad mandate to invest in a wide array of stocks and came up with the three stocks that most mutual funds invest in

As part of the special issue on mutual funds, we tried to understand which stock is bought the most by asset management companies (AMCs). Given that thematic or sectoral schemes focus on their themes and sectors, we eliminated the sub-category. Similarly, we eliminated schemes dedicated to one market-cap category only (such as large-cap, mid-cap and others), assuming there would be too much bias.

We chose equity-linked savings schemes (ELSS), flexi-cap, multi-cap, large-and-mid-cap, and value/contra categories. This led us to a shortlist of 149 funds that have a broad mandate, whereby a fund manager had invested in a wide array of stocks from April 1-30, 2024. Within this, we looked at the stocks that were bought the most from three aspects.

One, the stock that was most bought by value (Axis Bank).

Two, the stock which sold the maximum number of shares with a value of over Rs 100 crore across AMCs (Vedanta). At times, the price of the stock changes due to market impact, and the change in value alone doesn’t necessarily reveal interest. If a share is valued at a low price, it is traded more and showcases higher volume, but the value of the purchase may not be significant. So, we considered volume along with the value of the purchase.

Three, to make sure that a small fund house buying many stocks can also result in a lopsided view, we redid the exercise only on funds from the same set of categories, whose assets under management (AUM) was more than Rs 5,000 crore (Angel One).

Here’s our take on the three stocks thus chosen.

AXIS BANK

Part of the Nifty 50, Axis Bank is India’s third-largest bank. If we look at the company from a SWOT (strength, weakness, opportunity, threat) framework, the bank’s strength lies is in its institutional framework, the regulatory oversight by the Reserve Bank of India (RBI), being one of the most liquid stocks, and being managed by a professional board as there are no real promoters of the business; the promoters will be public sector undertakings (PSUs), and they only hold a small portion of the shareholding.

The stock has shown mixed performance. Mutual funds and domestic institutional investors (DIIs) have increased their holdings, indicating confidence in the company, while foreign institutional investors (FIIs) slightly reduced their stake.

Non-performing assets reduced— gross non-performing assets (GNPA) at 2.02 per cent declined by 80 basis points (bps) year-on-year (y-o-y) and 36 bps quarter-on-quarter (q-o-q); and net NPAs at 0.39 per cent declined 34 bps y-o-y and 8 bps q-o-q. However, from a price-to-book (P-B) ratio perspective, the bank is trading at a higher level; the median P-B for the last 10 years has been 2.4 times, whereas the current P-B value is 2.7 times.

The company has demonstrated good quarterly growth, with increasing revenue and profits every quarter for the past four quarters (ending in Q4 FY24). Despite these growth metrics, the stock’s declining cash flow from operations over the past two years highlights a potential issue with cash generation from its core business.

It is extremely liquid as a stock, meaning it is easy to buy and sell on the stock exchange. Of the 149 funds in our universe, 109 held the stock, of which 42 increased their holdings; 12 funds, which had no investment in the bank earlier, bought it in April. Meanwhile, 20 funds reduced their holdings in the bank, and two funds exited the stock.

Of the 13 brokers who actively cover the stock and share the data in the public domain, nine have a “buy” recommendation, and two suggest “hold”. The average broker consensus estimate pegs the fair value at Rs 1,294, with the highest estimate putting the share price at Rs 1,450 (this estimate is valid only until the June ending quarter results are out).

The increased holdings by mutual funds and DIIs also reflect heightened interest and confidence among investors. Long-term investors may invest via a large-cap index fund or let their active fund manager decide when to take exposure.

VEDANTA

Vedanta is a large-cap company, which means it is among the top 100 companies by market capitalisation. The conglomerate manages many commodity businesses, which are typically cyclical in nature. Since Vedanta has many subsidiaries and they are all into commodities, predicting the cycle, and hence the business, is very difficult.  

The company generates the majority of its revenue from India (65 per cent), followed by Malaysia (9 per cent) and China (3 per cent). Notably, it is the sole producer of nickel in India following its acquisition of a nickel and cobalt plant in Goa. Its subsidiaries, like Hindustan Zinc (HZL), dominate the market, with HZL holding 80 per cent market share in India’s primary zinc production.

From a fundamental perspective, the stock shows several signs of concern. There is degrowth in revenue and profit, with declining quarterly revenue and profit over the past two quarters. The company has also seen a major fall in net profit trailing 12 months (TTM), coupled with a decline in annual net profit over the last two years.

Additionally, the company is struggling with increasing debt, and promoters are decreasing their shareholding q-o-q. Return on equity (ROE) and return on assets (ROA) have declined over the last two years, suggesting poor profitability and asset management. Red flags include links to ongoing regulatory investigations or legal cases, which could pose significant risks to valuations.

However, FIIs and foreign portfolio investors (FPIs) are increasing their shareholding, which reflects growing confidence from large investors.

In our universe of funds, only four funds held the stock at the start of April. During the month, seven funds added the stock to their holdings. Therefore, by the end of April, there were 11 funds with a position in the stock.

We also checked the views of the brokerage industry. Not many analysts have written about the stock; we were able to identify only three analysts who have shared their reports in the public domain. All their targets, ranging between Rs 315 and Rs 452, have been met. The next update will likely be released after the quarter ending June 2024.

Long-term investors with a contra view can choose to invest in it. However, it carries high risk over 1-2 years because if the business deteriorates, then valuations would fall further.

ANGEL ONE

It is a stock broking and wealth management firm, often classified as a diversified financial services company. The broking arm can come under pressure if the trading and margin-giving business crumbles under market pressure or due to regulatory measures. However, the wealth management arm can protect the downside for the group.

The company has demonstrated impressive financial performance, which is evident from its high TTM earnings per share (EPS) growth and strong q-o-q EPS growth in recent results. It has reported good quarterly growth, with net profits and profit margins improving. Revenue has been on the rise for the past three quarters, and annual net profits have improved consistently in the last two years. Additionally, the book value per share has also been on the rise for the past two years.

Institutional investors, including FIIs and FPIs, have been increasing their shareholding. However, there has been a notable decrease in promoter holding by more than 2 per cent q-o-q, which could raise concerns. Despite this, the company’s strong financial metrics position it well for future growth.

As of April-end, 19 mutual funds held the stock. Of these, 10 had bought the stock during the month, three had it earlier and didn’t increase the holding and six funds increased their holdings during April.

We could identify only three analysts who had shared their reports in the public domain. One’s target of Rs 2,795 was met, while the other two set targets of Rs 3,469 and Rs 4,200.

If the stock price corrects further, long-term investors may invest in this stock.

*These are not stock recommendations. Investments in securities markets are subject to market risks, consult a Sebi-registered investment advisor before investing.

The author is a Sebi-registered research analyst and a financial writer