Global index provider MSCI may drop its Limited Investability Factor (LIF) at its upcoming May quarterly review, with the foreign headroom in the bank inching past the 25% threshold at the end of March quarter, according to analysts.
Foreign investors held 41.24% of the shares in Kotak Mahindra Bank as of March 31, 2023. With the foreign ownership limit at 55%, that translates to a foreign room of 25.02%.
This may push up Kotak Mahindra Bank’s weight in the MSCI India index from 1.38% to 2.68%, leading to potential inflows of $950 million, according to Brian Freitas of Periscope Analytics who publishes on Smartkarma.
“As of end March, we compute the foreign room at 25.02%, while the BSE computes the foreign room as 25.47%. The difference comes from the Non-Resident Indian (NRI) holding where there is no split provided between the Repatriable and Non-Repatriable holdings of this group of investors,” said Freitas.
Freitas estimates that passive MSCI trackers will need to buy around 44.27 million shares of Kotak Mahindra Bank at the close on May 31.
“That is big and there will be buying from foreign passive trackers. Given the low foreign holding, there could be buying from active foreign and domestic investors ahead of the passive buying,” he said.
On Tuesday, shares of Kotak Mahindra Bank ended higher 4.6% to Rs 1,840.
The bank was included in the MSCI India Index in November 2020 with a LIF of 0.5 as the foreign room was lower than 25%. The higher headroom at the end of March quarter, however, could result in the change in adjustment factor to 1, as per MSCI guidelines, resulting in higher weight.
The bank’s foreign room had stayed below 20% for the last couple of years. That has nudged above 20% as of end-June 2022 and has continued to move higher from there. The shareholding pattern as of end-March 2023 shows foreign room increasing to higher than 25%, with promoters owning 25.96% of the company while foreign portfolio investors holding 37.78%.
The increase in foreign room is a result of FPI selling during the past quarters, resulting in a drop in their holding from a high of 45.09% in December 2020 to 40.86% in March 2022, 40.55% in June 2022 and 37.78% in March 2023. Kotak Mahindra Bank has been the worst performing stock among Indian private sector banks since the start of January 2021.
“The bank still trades richer than its peers but the valuation gap has shrunk a lot over the last few years. It is trading at the lowest end of the historical range versus ICICI Bank and there could be a move higher off the lows as the passive MSCI and other global index trackers buy the stock,” said Freitas.
The price cutoff date for MSCI’s May 2023 Quarterly Comprehensive Index Review can be any one of the last 10 business days of April. The cutoff date will use prices to calculate market cap, data used to update foreign inclusion factors, and data used to incorporate all foreign room changes.