Bizarre valuation calls for cautious optimism

Finance Minister Arun Jaitley strikes the gong at the launch of India's first agri-Options by National Commodity and Derivatives Exchange Limited (NCDEX) in New Delhi. Pic/PTI

The market movement continued and the momentum was kept intact. The BSESENSEX gained 438.54 points or 1.27 per cent to close at 34,592.39 points. NIFTY gained 122.40 points or 1.15 per cent to close at 10,681.25 points. The broader indices saw the BSE100, BSE200 and BSE500 gain 0.99 per cent, 0.91 per cent and 0.95 per cent respectively. BSEMIDCAP was up 0.37 per cent and BSESMALLCAP was up 1.44 per cent.

Cent percent
The top sectoral gainer was BSEREALTY up 5.22 per cent followed by BSEIT 4.31 per cent and BSETECH 2.80 per cent. The top loser was BSEPOWER down 0.85 per cent followed by BSEAUTO 0.24 per cent. In individual stocks, the top gainer was Coal India up 9.5 per cent, followed by Infosys 6.12 per cent and Reliance Industries 2.53 per cent. The top loser was Bharti Airtel down 6.01 per cent followed by NTPC 3.11 per cent and Power Grid 2.24 per cent. Dow Jones had yet another week of solid gains and was up 507.32 points or 1.97 per cent at 25,803.19 points. The Indian Rupee weakened 24 paisa or 0.38 per cent to close at 63.61 to the US Dollar.

Unbelievable levels
The primary market continues to be posting crazy subscription levels, the like of which have never been witnessed. The issue from Apollo Micro Systems Limited was subscribed a massive 248.5 times. Non-institutional portion or HNI category was subscribed 958 times. The cost of funding at this level is more than the issue price. This kind of response puts more pressure on the company to perform as suddenly the expectation zooms. Whether they are able to achieve the same or not is another story.

Two view
There are two primary market offerings. The first is an issue from Newgen Software Technologies Limited which is tapping the capital market with its offer for sale 1.34 crore shares and a fresh issue for R 95 crore. The issue priced in a band of R 240-245 would open on Tuesday January 16 and close on Thursday, January 18. The PE multiple at which the shares are being offered is 22.79-23.27 times. The company is a product company in the ECM, BPM and CCM space. In layman's language, it is about documents and digitisation and is a growing business.

Careful call
The second issue is from contact manufacturer of white goods maker Amber Enterprises Limited. The company is tapping the capital markets with its issue to raise R 600 crore in a price band of R 855 to 859. The issue comprises a fresh offer for R 475 crore and an offer for sale of R 125 crore. The shares are being offered at a PE multiple of 61.91 to 62.20 times based on its March 2017 results. The share is priced keeping in mind the response that Dixon Technologies had received and the success of the same. There is one difference that the share appreciated post listing and made huge money for the investors. The share was issued at a price of R 1,766 and after four months of trading is at R 3,842, a gain of over 117 per cent. One needs to look at this asking price a little carefully and not get carried away with HNI leveraged subscriptions.

Good numbers
Infosys reported a good set of numbers for the quarter October to December 2017, helped to a large degree by reversing earlier tax provisions, no longer required after a US tax advisory. The stock gained for the week on the back of guidance for the current year being maintained by the company. IDFC Bank and Capital First have announced a merger. Shareholders of Capital First would be given 13.9 shares for every share of Capital First held by them in IDFC Bank. The earlier plan to merge IDFC Bank with Shriram Transport Finance had fallen through and this is the second attempt by IDFC Bank to enter into an alliance.

Result season
Results season for the quarter October to December 2017 have begun. Over a 100 companies would be declaring results in the coming week, from the broad or large cap space. The summary of these results would give a fair trend of the performance and the expectation of growth from these results. Markets have managed the momentum so far. With each passing week, the going is getting tougher. It would be interesting and important to see how markets behave this week with the result season on. The primary market is facing a peculiar situation with excess liquidity and obscene valuations. Who wins is critical and important from the fundraising prospect, as a large number of companies line up to raise money. Trade cautiously.

Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is for educational and information purposes only.

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