Markets at new highs may lead to increased volatility

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By Arun Kejriwal

 

Markets were on a roll and they finally broke out of the resistance zone last week. Not only did they break out, but they did it in style. BSESENSEX gained a massive 1,690.88 points or 3.22 per cent to close at 54,277.72 points while NIFTY gained 475.15 points or 3.01 per cent to close at 16,238.20 points. The broader market saw BSE100, BSE200 and BSE500 gain 2.75 per cent, 2.43 per cent and 2.16 per cent respectively. BSEMIDCAP was up 0.51 per cent while BSESMALLCAP was up 0.07 per cent. In just supporting the gains mentioned above, there were no sectoral losers in the indices. While the top sectoral gainer was BSEBANKEX which gained 3.93 per cent the one to gain the least was BSECAP GOODS which gained a mere 0.47 per cent.

BSESENSEX made a new lifetime high of 54,717.24 points while the closing high was 54,492.84 points. NIFTY similarly made a closing high of 16,294.6 points while the intraday high was 16,349.45 points. Incidentally, all these highs were made on Thursday the 5th of August as markets were weak on Friday and lost ground.

The Indian Rupee gained 25 paisa or 0.34 per cent to close at Rs 74.16 to the US Dollar. Dow Jones gained 273.04 points or 0.78 per cent to close at 35,208.51 points. This incidentally was a new lifetime high closing and the intraday high recorded was at 35,247 points.

Dow and Indian indices currently are at new highs and it seems the momentum is just picking up at least in India.

RBI at its policy review meet held between the 4th to 6th of August, decided to keep key interest rates unchanged with a 5-1 vote. The stand would be to keep policy as accommodative. RBI has reduced the GDP forecast for FY2021-2022 to 9.5 per cent from the earlier 10.5 per cent.

In the week gone by the primary markets saw four issues opening on Wednesday and closing on Friday. All the four issues were very well received and oversubscribed. The driving force behind the success of issues is the response from retail investors which is becoming scary. So much so that in the case of one issue, Exxaro Tiles, the retail subscription alone was more than 4.3 times the total subscription received from QIB’s, HNI’s, and Employees. Retail investors bid for 21.10 crore shares and there were 14.51 lakh applications while the total bids were for 25.96 crore shares. The company had tapped the capital markets with its fresh issue and offer for sale totalling Rs 161 crore. The issue garnered response of over Rs 3,100 crore.

The second issue was from Devyani International Limited which had tapped markets with its fresh issue of Rs 440 crore and an offer for sale of 15.53 crore shares. The issue was subscribed 116.71 times with there being 38.40 lakh applications. The issue received support for roughly Rs 1.19 lakh crore including anchor allocation.

The third issue was from Krsnaa Diagnostics Limited which had tapped markets with a fresh issue of Rs 400 crore and an offer for sale of 85.25 lakh shares. The issue was subscribed 64.40 times and received subscription of over Rs 44,000 crore. There were over 21 lakh applications.

The fourth and final issue was from Windlas Biotech Limited which had tapped the markets with its fresh issue of Rs 165 crs and an offer for sale of 51.42 lakh shares. The company garnered subscription of over Rs 6,500 crore and was subscribed 22 times. The issue received 21 lakh applications in all.

These four issues clearly demonstrate the ability of retail investors applying for every issue irrespective of fundamentals or business.

The issue from Glenmark Lifesciences Limited which had received a record 39.5 lac applications and was subscribed over 45 times, listed and had a poor outing. Shares were issued at the top end of the price band of Rs 695-720, and debuted at Rs 751 and Rs 750 on the two exchanges. After having a tough day at the bourses, they managed to close at Rs 748.20, a gain of Rs 28.20 or 3.92 per cent. This is certainly a very poor performance from the company and has belied expectations.

Shares of Rolex Rings would list on Monday the 9th of August.

The week has four more issues opening and closing during the week ahead. Two of these would open on Monday and close on Wednesday while the other two would open on Tuesday and close on Thursday. There are two distinct features attached to these issues which are the last of the lot from this maddening pace of IPO rush. The first is the size of these issues where they range from 3,000 crore to 5,000 crore. The second is the fact that each of these issues has an issue which is to be separately understood and is important. Compare this with the last four issues where all four put together were about Rs 3,600 -3,700 crore in size.

The first issue is from Nuvoco Vistas Corporation Limited, from the house of Nirma, which is raising a fresh issue of Rs 1,500 crore and an offer for sale of Rs 3,500 crore. The price band is Rs 560-570. The company is a cement producer and is the 5th largest producer in India and the largest in Eastern India with 22.34 million tons. The company has reported losses for two of the last three years on account of integration and merger issues. Going forward the issue would be addressed. However, at this point of time there is no EPS or PE.

The second issue is from Car Trade Tech Limited which is the only car platform making profits. The offer for sale is for 55,59,664 equity shares in a price band of Rs 1,585-1,618. Though the company reported a net profit of Rs 101.1 crore of which there was an entry of Rs 63.9 crore which would be a one-off adjustment on account of deferred tax. On an adjusted basis the profit would be Rs 37.2 crore. The EPS as mentioned by the company on diluted basis is Rs 19.6 against Rs 5.1 in the previous year. This would get adjusted to Rs 8. This means the PE for the company is a staggering 200 times. Great business, brilliant future and certainly market euphoria gives the stock a grey market premium as well.

The third issue is from Aptus Value Housing Finance Limited which is tapping the capital markets with a fresh issue of Rs 500 crore and an offer for sale of 6.46 lakh shares in a price band of Rs 346-353. Good company, niche market and business but asking for a valuation of price to book of an unheard of 8.41-8.58 times. This is based on the NAV of the company as of 31st March 2021 of Rs 41.12. Clearly merchant bankers and exiting PE investors are thinking that markets will accept just any valuations. They are right that the issue will get subscribed, but that is just one small part of the story. What about the life of the company post listing?

The final issue is from Chemplast Sanmar Limited who had delisted the company in 2012/13 and caused tremendous losses to investors. This company is now coming back with a reorganised, restructured company but basically the same business and asking investors to pay Rs 530-541. The company has a negative net worth and the object of the issue is to repay the PE investor who had invested in the holding company with lots of conditions. While the issue will subscribe because of the momentum, there is bad taste in the mouth with the way the promoters treated minority shareholders. Apply with caution.

The markets will remain volatile considering that they are trading in new territory. While we have made new highs and are likely to move up further, there would be sharp retracements as well. Looking at the euphoria in the primary market is making me have goosebumps, a feeling that I have not had in many many years. Not sure what the outcome of this would be but it certainly cannot be a nice feeling. Allotment in primary markets is only by way of lottery but post these four issues listing, I would not be surprised that the euphoria and the craze to apply takes a massive hit.

Use sharp rallies to book profits and equally sharp dips to buy only large cap stocks. Trade cautiously and choose what you apply in primary markets.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)

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