ICICI Bank Pips Infosys, Becomes Most Popular Stock in Equity Funds: Morningstar

Infosys has lost its place as the most widely held stock by equity funds to private lender ICICI Bank, Morningstar says. At the end of the March quarter, equity funds held ICICI Bank shares worth Rs 9,152 crore and Infosys shares worth Rs 7,330 crore, the report says.

The data illustrates two things;

1) Most fund managers are betting on cyclicals on hopes of a revival in the Indian economy post elections. Sameer Hassija of Morningstar India says factors like declining inflation levels and improving asset quality have also contributed to a positive view around the banking space.

In fact, equity funds increased their allocation to financial services from nearly 22 per cent at the end of the December quarter to nearly 24 per cent at the end of the March quarter.

The bet on cyclicals seems to be paying off with ICICI Bank shares rising 13 per cent during the last quarter.

2) Fund managers' patience with Infosys is running out. Share prices in India's second largest IT outsourcer declined by over 5 per cent during the March quarter. Though equity funds pared their exposure to the tech sector in the March quarter, they bought TCS shares and sold Infosys.

Infosys has been struggling to match the sales pace of its larger peers such as TCS and Cognizant. For the 2014-15 fiscal, Infosys expects its dollar revenues to grow at 7-9 per cent. In contrast, TCS' dollar revenues are likely to grow at over 16 per cent, while Cognizant had guided for at least 16.5 per cent growth in 2014.

On Wednesday, UBS downgraded Infosys to "sell" and said the company is focusing on boosting margins at the expense of stabilizing revenue and market share. (Read the full story here)

Infosys has also been bogged down by high attrition and a spate of exits at the top level. Infosys' attrition rose to 18.7 per cent in the March quarter from 16.3 per cent in the December quarter. The company's attrition rate is currently higher than its biggest competitor TCS (11.3 per cent) as well as third-ranked outsourcer Wipro.

Infosys executive chairman NR Narayana Murthy has maintained that the process of rebuilding Infosys will take three years. In that sense, Infosys has now become a long-term story and that may be another reason for the fund managers' shift from Infosys to TCS, which has been consistently reporting industry leading growth and margins. (Read)

Besides the above-mentioned company-specific issues, Infosys is also facing some sector-related headwinds. The improvement in the US economy is not yet reflecting in improved demand environment for Indian IT companies. The recent appreciation in the Indian currency against the US dollar will weigh down on margins of most companies.

Infosys shares closed lower for a fourth straight day on Thursday. The stock has shed 14 per cent over the last three months and has underperformed the broader BSE IT index, which is down 7.7 per cent during the same period.

Other findings from Morningstar:

Telecom giant Bharti Airtel was the most sold stock during the quarter. State Bank of India has regained attention after heavy selling last year. Energy giants like ONGC, Indian Oil & GAIL India were the most bought stocks during the quarter. Equity mutual funds have steadily decreased exposure to mid-cap stocks and increased exposure to large-cap stocks over the past few quarters.