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Sensex Trades in Red; Metals Sector Leads Losses

Fri, 16 Mar 01:30 pm

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After opening the day in red, share markets in India have continued the downtrend and are presently trading below the dotted line. Sectoral indices are trading mixed with stocks in the energy sector and stocks in the realty sector trading in red. While stocks in the consumer durables sector are trading in green.

The BSE Sensex is up by 310 points (down 0.9%) and the NSE Nifty is trading down by 100 points (down 0.1%). Meanwhile, the BSE Mid Cap index is trading down by 0.4%, while the BSE Small Cap index is trading down by 0.2%. The rupee is trading at 64.88 to the US$.

In news from stocks in the aviation sector. Interglobe Aviation, which operates the Indigo Airliens brand was under pressure, and slumped over 1.2% in early trade today.

The company's shares witnessed selling pressure after the aviation regulator, Directorate General of Civil Aviation (DGCA) ordered the grounding of 8 Indigo and 3 GoAir planes.

This has led to the companies cancelling flights. The grounding of planes due to engine malfunction have led IndiGo and GoAir to cancel around 620 flights this month. IndiGo has decided to cancel around 480; the rest are of Go Air. The airlines will give passengers an option to choose an alternate flight or get a full refund.

On Monday, DGCA had ordered the companies to ground A320 Neo aircraft fitted with Pratt & Whitney engines, citing safety concerns.

The DGCA order follows reports of three separate incidents involving mid-air engine shutdowns for the same type of aircraft.

The problem stems from a component that can show early signs of wear and is located in an area that must withstand high pressure.

IndiGo controls 39.6% share of the domestic market, with 153 planes and over 1,000 daily flights to 49 cities.

Indian Aviation Spreading its Wings

Air travel has recorded double-digit growth for 40 consecutive months, thanks to low fares, the addition of new flights/destinations, and overall growth in the economy.

What's foreseeable for India's aviation traffic in 2018 is some pressure on the back of the consistent rise in crude oil prices. Earlier this month, Brent crude oil briefly breached US$70 per barrel and touched its highest level since December 2014. Crude prices have been driven up by production curbs in OPEC nations and Russia, as well as by robust demand on the back of healthy global economic growth.

Oil prices are closely monitored by the Indian air carriers, as aviation turbine fuel is their single largest input cost. A sharp rise in the cost of fuel puts pressure on margins, and consequently an increase in air fares.

Although air travel is becoming the new normal, investors need to understand the industry dynamics before buying up aviation stocks.

Moving on to news from the IPO space. The Rs 9.6-billion initial public offering (IPO) of state-run Bharat Dynamics which closed yesterday, barely managed to sail through.

The IPO received a lukewarm response from retail investors and was subscribed just 1.3 times.

Note that the high net-worth individual (HNI) and employee portions failed to garner full subscription.

While, the institutional investor portion of the IPO was subscribed 1.5 times and the retail portion had garnered 1.4 times subscription.

Headquartered in Hyderabad, Bharat Dynamics is the sole manufacturer of Surface to Air Missiles (SAM), Torpedoes and Anti-Tank Guided Missiles (ATGM) in India. It is a public sector undertaking under the Ministry of Defence.

The company has grown its revenues and profits at a compounded annual growth rate of 130% and 5% respectively in the preceding three years. At the upper price band of Rs 428, the company is valued at 16 times it's FY17 earnings. Get a detailed analysis and our view on this initial public offer by clicking here (subscription required).

Speaking of IPOs, if you've been tracking the demand for IPOs, you would certainly think that 2017 is 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.

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.

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

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