Sensex Trades on a Volatile Note; Energy Stocks Top Losers

Thu, 11 Jan 01:30 pm

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After opening the day in red share markets in India  witnessed choppy trading activity and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the realty sector and stocks in the IT sector witnessing maximum buying interest. While stocks in the energy sector are leading the losses.

The BSE Sensex is trading up by 90 points (up 0.3%) and the NSE Nifty is trading up by 30 points (up 0.2%). Meanwhile, the BSE Mid Cap index is trading up by 0.8%, while the BSE Small Cap index is trading up by 1.2%. The rupee is trading at 63.73 to the US$.

In the news from commodity markets, crude oil is witnessing continued buying interest today. Oil prices held near three-year highs, supported by a surprise drop in US production and lower crude inventories.

Over the last year, oil prices have been generally supported by a production cut led by the Organisation of Petroleum Exporting Countries (OPEC) and Russia, which started in January last year and is expected to go on through 2018.

Note that crude oil prices have been on a rising trend this year. However, this is not good news from India's perspective.

As we wrote in a recent edition of The 5 Minute WrapUp...

• Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.
  
  Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.
  
  Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurizing profitability.

You can read the entire article here.

Our in-house economist, Vivek Kaul has put India's crude price dilemma very succinctly in his article titled - When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up.

In addition, Vivek Kaul has penned his views about the government and economy in his book, India's Big Government The Intrusive State & How It's Hurting Us. You can read more here.

Moving on to news from the IPO space. Apollo Micro Systems' IPO which yesterday, was already oversubscribed by 2.1 times on the first day, and was subscribed by over 3 times at the time of writing.

The offer will be open till 12th January and the company intends to raise Rs 1.5 billion from its public offering.

Over last two decades, Apollo Micro Systems has developed an established brand name, acceptance and recall value in the defence ESDM sector.

It is an electronic, electro-mechanical, engineering designs, manufacturing and supplies company and designs, develops and sells high-performance, mission and time critical solutions to Defence, Space and Home Land Security for Ministry of Defence, government controlled public sector undertakings and private sectors.

The price band of the IPO is finalised at Rs 270 to Rs 275 per share.

Should you subscribe to its IPO? We have analyzed this IPO and have released our analysis on the company. You can access it here (subscription required).

Poor IPO Returns Post Listing

Chart Title: Poor IPO Returns Post Listing

If you've been tracking the demand for IPOs, you would certainly think that 2017 was the year of IPOs. For one, IPO subscriptions were at sky high levels. But if the performance of recently listed IPOs are anything to go by, they have flattered to deceive.

Of the five recent high-profile IPOs which listed on the stock market, four have given negative returns soon after listing.

The IPO activity in FY17 is mainly driven by Offer for Sale (OFS) rather than fresh issues. An OFS is a route through which existing promoters and private equity investors offload their stake. Here, the money from the sale goes to the selling shareholder. Whereas, in a fresh issue, the money raised goes to the company who, normally, utilizes this money to repay debt, for capital expenditure, etc.

Also, the number of Private Equity (PE) investors exiting these companies raised a red flag. These PE investors had bought a stake in the IPO recently at a fraction of the listed price. Sensing the frenzy, they were able to offload their stake with multifold returns.

The only person left high-and-dry here was the retail investor. And, this is not a recent occurrence. The IPO euphoria is something similar to what was seen in 2007-08. More than 70% of the IPOs listed in 2007 and 2008 were in the red, even today when the Sensex is at an all-time high.

But it doesn't make sense to completely ignore this space. The IPO space has also given us names like Maruti, TCS, and Jubilant Foodworks Ltd (with returns over 4,000%, 1,000% and 500% respectively) that have created immense wealth for shareholders.

For the retail investor, it is very important to ignore the noise and focus on the fundamental and valuations on the table. And more often than not, this approach works much better than following the herd.

That's Ankit Shah's approach at Equitymaster Insider. He keeps an eagle-eye on the developments in the IPO space and updates his readers on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It is free. Just click here.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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