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Will you join the upcoming Rs 700 bn party?

Mar 3, 2015

In this issue:
» The sorry state of State Electricity Boards
» Telecom spectrum auctions begin tomorrow
» is China looking more like Japan?
» ...and more!

00:00
2014 was a historic year for the Indian markets. With a gain of about 30% the benchmark indices left the doom and gloom years of the UPA era behind it. Retail investors too returned to the markets. The rising tide lifted stocks, big and small alike, across sectors. However, there was one aspect of the Bull Run that lagged behind: the primary market. Consider this; in the whole of 2014 there were just five IPOs which raised a total of about Rs 12 bn. This was the lowest in over a decade!

Usually, a frothy IPO market is a sure sign of an overheated market. It should come as no surprise that giant public issues tend to coincide with market tops. We all remember the Reliance Power IPO in January 2008 which came as the market peaked at 21,000. Even the Coal India IPO in Nov 2010 had coincided with the market getting back to the 21,000 mark. Most of the time investors end up waiting for long to breakeven on such investments... if at all.

Well we believe that history will soon repeat itself. With the indices trading at 20 times earnings, corporate India is all set to go on a massive fund raising drive! If reports in the financial press are anything to go by, about Rs 20 bn could be raised in this month itself. And that would be just the beginning. A staggering Rs 700 bn worth of IPOs, QIPs, FPOs and rights issues are lined up for 2015. This is excluding the government's disinvestment program.

This bit of news comes as no surprise to us. We have seen this sort of party before and it has never had a happy ending. We don't want to sound pessimistic but experience has taught us to be cautious at these times. Most of the public issues to hit the markets soon, will see private equity (PE) investors exit in large numbers. They are playing it smart, as they always do. They made their investments at cheap or reasonable valuations. They are now looking to sell their overvalued shares to gullible retail investors with the promise of quick IPO profits. Do not fall into this trap!

We believe investing in IPOs must be done very selectively. The phrase 'Buyer Beware' rings true in such cases. Please note that we are not saying that all of the upcoming IPOs must be shunned. Some of the better issues, if available at reasonable valuations, can certainly be considered. However, make no mistake about the fact that most of them will be horribly overpriced. If you choose to play along, the chances are that you would be putting your personal finances at risk. So coming back to the question: do you really want to join the upcoming Rs 700 bn party?

Will you be putting your money into the slew of IPOs lined up in 2015? Let us know your comments or share your views in the Equitymaster Club.

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02:28
An important economic event will get underway tomorrow. The government will start the bidding process for the 2015 telecom spectrum auctions. Not only will it be the biggest in terms of the quantum of airwaves being auctioned, it will also be the most important one in recent times. Why is it so important? Spectrum licenses of quite a few telcos will be expiring this year. Consider the scenario where your mobile operator fails to win back the expiring spectrum. We could be staring at such a nightmarish scenario.

In the auctions, India's three largest telecom operators Bharti Airtel, Vodafone India and Idea Cellular will battle it out with Mukesh Ambani's Reliance Jio Infocomm. This year's spectrum sales could raise anywhere between Rs 600 to Rs 900 bn for the government. Although the payout by the operators will be staggered; the government is all set to make a killing which will help to contain this year's fiscal deficit to 4.1% of GDP. However, for the telecom firms, it could end up as a battle for survival.

03:18
  Chart of the day
That India's power sector is riddled with a variety of problems is a fact well known. While the demand for power has only increased, the government has not been able to stick to its targets of power production. What more, there are considerable challenges on the distribution side as well. The most pressing case is the sorry state of affairs at State Electricity Boards (SEBs). SEBs have had to bear the burden of subsidies and have not been able to raise power tariffs. Indeed, as the chart shows, the amount of subsidies booked for SEBs has only increased over the years. As against this, the subsidy actually received has only been on the lower side. This has put a strain on the balance sheets of SEBs. Generation companies, too, are put under pressure as the plant load factor (PLF) comes down.

Indeed, unless quite a few of the issues relating to the power sector are resolved, the impact of this will be felt by banks too especially those who are considerably exposed to the power sector.

Sorry state of State Electricity Boards (SEBs)

04:12
Predictions in the past have been galore about how China is all set to topple the US as the world's main economic power. After all the Chinese economy then had been growing at a blistering pace, while growth in the US had been slowing down. But does the comparison to the US still stand? Or is China beginning to look more like Japan? An article on Bloomberg points out how the vulnerabilities in China at present look increasingly similar to those of Japan way back in 1990.

Indeed, China in recent times has been afflicted by a slew of problems such as an overheated property market, massive pile on of debt, bad loans and an overpriced stock market. From a longer term perspective, the gradually ageing population is also something that China will have to worry about. Pension and healthcare costs are bound to rise. This is pretty much akin to what Japan is facing now. While this is not enough to determine whether China too will suffer a lost decade, it goes without saying that the dragon nation is slowing down. And it could be a while before it starts growing at the pace it did in the past.

04:45
The Indian stock markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading up by around 113 points. Gains were largely seen in oil and gas, healthcare and IT stocks. As far as global markets are concerned, while Asian indices were trading mixed at the time of writing, the European indices were trading firm.

04:56
 Today's investing mantra
Owning stocks is like having children; don't get involved with more than you can handle" - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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2 Responses to "Will you join the upcoming Rs 700 bn party?"

Dorairaj R

Mar 3, 2015

Wisest of all articles. But people easily forget the past.At least to save new breed of optimists, please publish this once in every fortnight;that would be the greatest service by you.

One suggestion;please advise SEBI new do's and dont's in fixing issue price so that the dangerous Reliance Power is not repeated.

Like (1)

kamlesh bhatt

Mar 3, 2015

It is experience that post issue, most of the shares could not hold issue price and thus investors found themselves trapped. So small investors having long term perspective should stay away.

Like (1)
  
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