Did the SBI Cards IPO Test Positive for Coronavirus?

Mar 16, 2020

Ankit Shah, Research analyst

On Friday, I witnessed the wildest ever trading session in my entire career.

From trading being frozen for an hour after the benchmark indices hit the lower circuit to rebounding and closing the day 4% higher, it will probably go down as the most volatile day in the history of Indian stock markets.

Just a month ago - 12 February, to be specific - I was talking to a friend who runs a wealth management firm.

This was the time when there was renewed optimism among investors and the broader markets were rebounding. The total market capitalisation of all BSE-listed companies stood at about Rs 160 trillion on this day.

While the markets seemed upbeat then, my friend and I shared concerns about the state of the economy, the massive challenges and disruptions that many businesses were facing across sectors, and the worrying situation in the job market with many companies shrinking their workforce to keep costs under control.

Just a few weeks later, we are in the middle of the most terrifying bloodbath since the global financial crisis of 2008. Rs 30 trillion worth of investor wealth wiped off in a matter of one month. More on it in today's Chart of the Day.

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The coronavirus pandemic has emerged as a serious threat to global economic activity, which was already struggling under the burden of excessive debt and slowing growth.

The ensuing panic has triggered a severe market crash across world markets.

Now, coming to the SBI Cards IPO listing...

By the time this letter reaches you, the stock has most likely listed on the stock exchanges already. And all of you who have been allotted the stock are probably wondering what to do. I'll do my best to help you find an answer.

Before I get there, let's revisit the key highlights of the IPO...

The total size of the much-hyped SBI Cards IPO was about Rs 10,355 crore through a mix of fresh issue of equity shares and the offer for sale.

On 28 February 2020, prior to the opening of the IPO, SBI Cards finalized allocation of about 3.67 crore shares to anchor investors at a price of Rs 755 per share. With this, the company had already garnered Rs 2,769 crores from anchor investors.

For the remaining 10 crore shares, here's how different categories of investors bid during the IPO...


As you are aware, the IPO received a big thumbs-up from the markets and it was subscribed 26.5 times.

The total bids for the IPO were worth more than Rs 2 trillion. That's huge!

That's 2.9 times the company's total market capitalisation at the issue price and just 6% less than the total market capitalisation of parent company State Bank of India (SBI).

Given such a healthy response to the IPO, the expectations of listing day gains were obviously quite high.

Many investors who had missed the blockbuster IPOs of 2019 - IRCTC, Affle India, Indiamart Intermesh, and the likes - had pinned all their hopes onto this mega IPO.

But experience has taught us that it takes very little to turn the mood of the market from greed to fear.

What we're witnessing in the markets right now is EXTREME FEAR.

In such a scenario, what should you do now that the SBI Cards IPO has listed?

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On the very first day that the IPO opened for subscription, I'd alerted my premium subscribers at Insider of the possibility of the coronavirus pandemic infecting the IPO.

Here's what I had written to them on 2 March 2020:

    I see three key factors that could curtail the listing-day gain potential of this IPO:

    1. The Coronavirus effect: The markets have witnessed a bounce back today after a week of heavy selling. If the bearishness takes over again in the coming days, it could adversely impact the optimism around this IPO.
    2. Expensive IPO: The IPO demands a price to earnings multiple of 45.8 times at the upper end of the price band of Rs 755 per share. An expensively priced IPO reduces the headroom for further expansion in the valuation multiple.
    3. Liquidity guzzler IPO: At more than Rs 10,000 crore, the IPO size is huge. It will absorb a sizeable portion of the liquidity from the financial system. Besides, at the upper end of the price band of Rs 755, the post-issue market capitalisation of the company will be in excess of Rs 70,000 crore. It takes a lot more liquidity to move a largecap company than a smallcap.

SBI Cards IPO Makes Stock Market Debut

If you recall, the market correction had started a week prior to the opening of the SBI Cards IPO. Just the week before the IPO opened for subscription, the Sensex had tanked 7% in unison with the global stock market sell-off.

But investors were still optimistic about the IPO. The grey market premiums were in the range of Rs 250-300 per share. Investors were expecting listing-day gains of about 25-30% or more.

But as the market crash got deeper, the market sentiments have completely changed.

All those who had applied for the IPO hoping for quick listing gains were, in recent days, praying that they get to exit with minimum damage.

Given the sharp change in the mood of the market, I don't expect the IPO to offer any listing gains. There's a good chance that investors will dump the stock to make a quick exit, which could drive the stock price below the issue price.

What Should You Do?

If you received allotment in the IPO, you're most likely evaluating if you should bite the bullet and exit the stock on the listing day itself, or hold it for the long run.

Here's what I suggest:

  1. If you applied for the IPO for listing gains, make a quick exit if the IPO opens near or above the issue price. But I do expect heavy selling pressure at the time of listing, so there's also the possibility of the IPO opening at a significant discount to the issue price.
  2. The other possibility is to wait out a few days for the panic selling to subside. From the IPO subscription levels, it seemed that there is huge institutional demand for this stock. If this is indeed true, then institutional buyers will start accumulating the stock once the listing-day sell-off is over and the overall markets become stable. But even in this scenario, you must be prepared to exit the stock below the issue price because the recent bloodbath may result in a downgrade of valuation multiple assigned to SBI Cards.
  3. The third possibility is holding the stock for the long run. If you applied in the retail category, I am assuming 19 SBI Cards shares would be insignificant in relation to your overall portfolio.

    If you have the capacity to witness medium-term pain in terms of stock price performance, you could hold on to the stock. But do note that while the company has sound fundamentals, the fallout of the coronavirus pandemic will certainly have an impact on consumer spending, which the credit card company relies on.

    So, if you are willing to patiently hold the stock for the long-term, then you could just stay put and do nothing on listing day.

Chart of the Day

The chart of the day shows the trend in the total market capitalisation of all BSE-listed companies since the start of 2020.

Coronavirus Triggers Massive Wipeout of Investor Wealth

As you can see, through most of January and February, the total market capitalisation hovered between Rs 150-160 trillion.

It was only in the last week of February that a massive sell-off started on rising fears of the coronavirus outbreak escalating into a global pandemic.

On 2 March, the day the SBI Cards IPO opened for subscription, the total market capitalisation of BSE-listed companies closed at about Rs 146 trillion. Do recall that this was after the 7% crash in the Sensex the previous week.

By 13 March, this figure plunged even lower to Rs 129 trillion.

So, from the time of the IPO opening for subscription to a day prior to listing, investor wealth worth Rs 17 trillion got wiped out, representing a plunge of over 11%.

Given these factors, I believe that SBI Cards will list at a discount to the issue price of Rs 755 per share.

Warm regards,

Ankit Shah
Ankit Shah
Editor, Equitymaster Insider
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Well, even the systems expert now says it is time to start investing. Slowly, of course, but not to worry - we have the one stock that gives you the perfect place to start getting back into the markets. Learn about it here.

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