This year, so far, has been the merriest one for Indian Stock market. It has witnessed one of the greatest rallies despite the after-effects of demonetization and implementation of Goods and Services Tax (GST), a major economic reform since Liberalization, Privatization and Globalization (LPG).
It is evident that a broader category of people is buoyant about the economic outlook of the country, as the same may be observed by the way the general public has honoured the central government’s decision when high value currency notes were scrapped. All the major economic institutions have downgraded the GDP growth rate outlook for India following the decision, but surprisingly, markets have recuperated with such swiftness that nobody could anticipate. Next reform came with a wider vision than the previous one. GST, with a vision to formalize & sanctify the economy to a larger extent, came in with a tag line “One Nation One Tax” replacing all the existing taxes barring a couple. GST reform was also well acknowledged despite the initial hiccups in its implementation. GST council has also exhibited both pragmatism and flexibility in rationalizing the structure, rates and extension of deadlines as and when required.
GST may get further optimised
While India Inc was crippled in multiple taxation, GST tried to converge them and I believe there would be many more changes before it gets an optimal shape. While these moves disrupted many sectors, with some companies still not fully recovered from its impact within a quarter, stock markets have responded confidently forecasting a prosperous future for Indian corporate as a whole. Apart from these two reforms, stern action taken against shell companies and its directors, recent decision to recapitalize PSU banks and Bharatmala project among others are projecting a picture of more efficient, profitable and transparent environment for India Inc which further aids in enhanced corporate profitability. Accommodating the optimism, both Sensex & Nifty are trading ahead of its fundamentals considering their historical mean PE multiples.
Sectors like private banks, auto & auto ancillary, metals, FMCG, consumer durables and jewellery have seen a dream rally. For long time now, public sector banks have been laggards. However, the boost has come from mega recapitalization decision from the central government and since then almost all the PSU banks have run up from 25- 50% and are currently trading on an average at 1.15x on PB basis where as their private counterparts are trading at 3.0x PB.
IPOs are favourite
Along with equities, Initial Public Offerings (IPO) have been the favorites among investor class. The year 2017 is flooded with IPOs with humungous size and greater numbers. India has been particularly strong in terms of capital raising. Among the high spirits of booming equity markets, IPO issuances have hit a record high of 35 issuances so far in 2017 amounting to Rs 588 billion with 11 more in pipeline indicating the highest number of issuances since 2010 (when there were 59 IPOs). Nevertheless, the accumulated issue size in 2017 is almost double to that of 2010 IPOs.
In the SME IPO segment also, the market has witnessed 112 IPOs so far with the issue size amounting to Rs 1.4billion. In terms of public issues, Bombay and National stock exchanges and their SME markets as a whole are ahead of Europe, Middle East, India & Africa (EMEIA) by deal number. Indian exchanges have witnessed a cumulative 147 IPOs raising Rs 589 billion so far in 2017 from both mainstream and SME IPOs put together. The year kick started with two landmark IPOs: Bombay Stock Exchange became the first-ever Indian exchange to list and CDSL: the first ever depository to list on bourses. CDSL drew a lot of attention with 170x subscription. This robust capital raising activity is backed mainly by the buoyancy around the Indian economy.
There has been an increased listing in new sectors like insurance, depositaries, exchanges among others venturing into the bourses this year. Insurance sector has seen some major players like ICICI Lombard, GIC Re, HDFC Standard Life Insurance and SBI Life Insurance getting in the game, besides issuances like IRB InvIT (first real investment trust to be listed in India). Of these, Insurance sector IPOs have been unique as almost all the issues are trading either below or at par to the issue price. The reason could range from ascribing higher valuations to growth factors already being factored in the price. Huge issue size could also be a factor as well. As almost all the insurance players are drawing their profits mainly from their investment activity than from their Gross Written Premiums (GWP) (which have not witnessed any improvement), it may be the cause of concern with regards to listing gains.
High Five IPOs
Among the 35 new IPOs listed on exchanges, five stocks have more than doubled with Avenue Supermarts (D-mart), leading the table with a monstrous 270% return. Avenue Supermarts has completed its Rs 1,870 cr IPO on 21 March 2017, which came at a time when share markets were rallying, with the BSE Sensex at its highest level. It is the IPO which re-rated the entire retail sector due to which its peers like Future Retail & V-mart have seen an exceptional rally as a rub-off effect. Avenue IPO was issued at Rs 299 per share and got listed at Rs 642.After gathering a lot of institutional & retail interest, the stock has crossed Rs 1,000 mark and reached a high of Rs 1,288 before settling at Rs 1,106 levels.
This remarkable rally pushes it to the top of IPO chart for the year 2017. Along with Avenue, Shankara Building Products has also given a return of 224% till date with an issue price of Rs 460. While Apex Frozen, CDSL & Salasar Techno Engineering have more than doubled, four other company listings have accumulated a decent wealth to the investors between 50%-100% since their issuances. Another nine companies have given respectable return between 10%-50%, ICICI Lombard & SIS Ltd have given a negligible single digit returns from listing. The list also includes negative returns from 12 companies with CL Educate Ltd losing around 37% and S Chand losing another 29% of their wealth.
A cheerful IPO market has prompted investors to invest in pre- IPO financing rounds as a means to placing sizeable bets on companies that are about to go public. Institutions, especially mutual funds flush with funds, are looking for newer ideas. IPOs offer those fresh investment ideas to such investors.
On a larger note, wherever the issue size is big and valuations have factored in future growth in IPO pricing, their listing gains have been limited. While the IPOs with backing of strong financial metrics & prospective future outlook along with reasonable pricing have given enormous returns. Companies with weak fundamentals and limited growth prospects have not performed well. In terms of subscriptions too, IPOs have seen some astounding response and in the case of several IPOs, the subscriptions have exceeded 100 times indicating the buoyancy in the IPO market.
To conclude, the market sentiment looks robust than ever before, which is indicated by the higher valuations of index fundamentals. Even at this juncture of high PE multiples with market cap to GDP reaching 100%, we see a lot of upside in the medium to long term. However, to see sustainability in the current market levels, it is imperative that earnings growth momentum has to come back. Once the earnings pick up, the indices can be expected to touch newer heights. Given the optimism among the investor community & increased participation from retail investors, we may witness more blockbusters in IPO segment along with double digit returns in indices in medium to long term. For good companies, where the long-term prospects are good and the management is sound, people are happy to take the bet.