Sensex Hits Fresh Highs; Metal Stocks Top Gainers

Tue, 24 Jul Closing

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After opening the day in green, share markets in India witnessed positive trading activity throughout the day and ended the day in green, at a new all-time high close. Sectoral indices too ended the day in green, with stocks in the metal sector and stocks in the realty sector leading the gains.

At the closing bell, the BSE Sensex stood higher by 107 points (up 0.3%) and the NSE Nifty closed up by 50 points (up 0.5%). The BSE Mid Cap index ended the day up 1.8%, while the BSE Small Cap index ended the day up by 2.2%.

Asian stock markets too, finished in green. As of the most recent closing prices, the Hang Seng was up by 1.3% and the Shanghai Composite was up by 1.6%. The Nikkei 225 was up by 0.4%. Meanwhile, European markets were trading on a positive note. The FTSE 100 was up by 0.9%, The DAX, was up by 1% while the CAC 40 was up by 0.8%.

The rupee was trading at Rs 68.94 against the US$ in the afternoon session. Oil prices were trading at US$ 73.4 at the time of writing.

Moving on to news from stocks in the telecom sector. Idea Cellular share price was in focus today after it was reported that Vodafone India and Idea settled al dues worth Rs 72 billion demanded by the Department of Telecom (DoT) to help seal the merger between the Idea Cellular and Vodafone India.

While DoT gave a conditional nod to the merger, however, before the two telecom giants begin to operate as one entity, the DoT insists on a Rs 72 billion towards one-time spectrum charges from the entities.

The DoT has asked for a bank guarantee of Rs 33.4 billion from Idea Cellular, while Vodafone has to pay Rs 39.2 billion in cash in lieu of spectrum liberalization.

Both Idea and Vodafone were expecting the merger deal to create India's largest telecom company to be completed by June 30, 2018. However, the process was stalled due to regulatory approvals.

Notably, Vodafone India and Idea Cellular merger is set to create India's largest telecom operator, surpassing Bharti Airtel Ltd. The top operator will have a revenue market share of around 37% and over 433 million subscribers.

The two companies were set to start operating as one entity from July 1 and for that to happen, the merger proceedings must be completed this month. Idea has called an extraordinary general meeting on June 26 to consider the proposals, including changing the name of the merged entity and raising funds of Rs 150 billion through debentures.

It will be interesting to track the progress of the new telecom leader, and whether it can sustain the pole position, in the hyper-competitive telecom industry.

At the time of writing Idea share price was trading down by 0.3%.

The entry of Reliance Jio and the fierce tariff war it has triggered has set off brisk activity in the telecom industry for fundraising and consolidation, as the incumbents look for ways and means to fend off the competition.

Telecom Sector: A decade of Underperformance

Note that the whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

Telecom companies are straddled with high debt, intense competition, and lack of pricing power. High spectrum costs and regulatory issues have hampered the sector. While consumers have benefited from low costs and new players fighting for their share, investors have suffered.

With the entry of Reliance Jio, the competition has intensified further. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Moving on to news from the IPO space. The IPO of HDFC Asset Management Company is set to open tomorrow. The IPO opens on July 25 and closes on July 27, 2018. The offering will entirely be an offer for sale (OFS) of 25.5 million shares by HDFC Ltd and Standard Life Investments Ltd. With the OFS, the selling shareholders aim to dilute their stake by 12% in the company.

The price band of the issue is set at Rs 1,095 to Rs 1,100 apiece.

HDFC Asset Management Company (HDFC AMC) is the asset management arm of Housing Development Finance Corporation (HDFC Ltd). Promoted by HDFC in 1999, Standard Life Investments (SLI) acquired 26% stake in HDFC AMC in 2001, and now the company operates as a joint venture between HDFC and SLI.

The company has been the largest AMC in India in terms of equity-oriented AUM since the last quarter of FY11.As of March 31, 2018, its proportion of equity-oriented AUM to total AUM was at 51.3%, which was higher than the industry average of 43.2%. Equity-oriented schemes generally have a higher fee structure than non-equity-oriented schemes, and this is where HDFC AMC wields its competitive advantage.

To know our view on this IPO, you can read our IPO note on HDFC Asset Management Company Ltd (requires subscription).

IPOs seem to be back in action as eighteen initial public offerings (IPOs) in the first six months of 2018 raised Rs 236.7 billion. This compares to Rs 120 billion that thirteen companies raised via IPOs in the year-ago period.

Note that the stock market is gearing up for a burst of IPO activity, with at least 12 companies planning to raise more than Rs 170 bn over the next two months, after a quiet start to the June quarter.

Also, according to EY India IPO Readiness Survey Report, globally, Indian exchanges recorded the highest IPO activity as the country saw 90 IPO launches that raised US$ 3.9 billion in the first half of this year.

We believe a merit-based selection, primarily including valuation, business, and management quality, is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

To know how to safely profit from the ongoing IPO rush, download this FREE report now and discover How to Get Rich with IPOs.

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

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