Indian Indices End Day Flat; Metal Stocks Top Gainers

Wed, 25 Jul Closing

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After opening the day in green, share markets in India witnessed volatile trading activity throughout the day and ended the day flat. Sectoral indices ended the day mixed, with stocks in the metal sector and stocks in the energy sector leading the gains.

At the closing bell, the BSE Sensex stood higher by 33 points (up 0.1%) and the NSE Nifty closed down by 2 points (down 0.1%). The BSE Mid Cap index ended the day down 0.1%, while the BSE Small Cap index ended the day up by 0.2%.

Asian stock markets finished in green. As of the most recent closing prices, the Hang Seng was up by 1% and the Shanghai Composite was up by 0.1%. The Nikkei 225 was up by 0.5%. Meanwhile, European markets were trading on a mixed note. The FTSE 100 was down by 0.6%, The DAX, was down by 0.2% while the CAC 40 was up by 0.1%.

The rupee was trading at Rs 68.73 against the US$ in the afternoon session. Oil prices were trading at US$ 74.4 at the time of writing.

Moving on to the news from IPO space. HDFC Asset Management Company, the joint venture between Housing Development Finance Corporation and Standard Life Investments, has opened its initial public offering for subscription today. The IPO seems to be in high demand as 43% of the shares available were subscribed within the first three hours on the first day of the bidding process.

This is the sixth public offer of the current financial year 2018-19, after TCNS Clothing, Varroc Engineering, RITES, Fine Organics Industries and Indostar Capital Finance.

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 Underperform Broad Market Indices

Speaking of IPOs, what if one had invested in all the IPOs? How have the IPOs performed in 2017? And, have they outperformed the indices?

According to an article in Business Standard, an investor who bet on the 33 IPOs of 2017 (on a weighted average basis) has seen the value of investment rise by 17%. However, compared to broad market indices, the underperformance is a bitter disappointment.

The above chart clearly shows the underperformance of IPOs.

Interestingly, if you take the Avenue Supermarts (D-mart) and HDFC Life out of the equation from the IPOs above, the gains drop to a meager 6%. Compared to this, the Sensex has gained 27%, while the small-cap index surged more than 50%.

What is the reason for this underperformance?

One of the key reasons IPOs have touched the altitude is due to a surge in the Indian equity market backed by liquidity and increasing investor demand for financial assets. Private equity investors and promoters took advantage of the absurd demand and came out with sky-rocket valuations. This is what we call a valuation bubble in the IPO market.

In our previous edition, we categorically stated:

• "With greed hypnotising most folks, it is time for retail investors to exercise caution. While this does not mean that you should avoid IPOs lock, stock, and barrel; just ensure you do not end up paying higher valuations for a company that is yet to establish its worth".

During such times, it is imperative to be critically selective when investing in IPOs. Carefully analyse each company for its own merits and don't give in to the hype surrounding the public offering.

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.

Moving on to news from stocks in the auto sector. Maruti Suzuki share price was in focus today after the company recalled 1,279 cars.

The company announced a recall of 1,279 Swift and Dzire models to check for a possible fault in the airbag controller units.

The issue pertains to the cars manufactured between May 7 and July 5, 2018.

The owners of the vehicles affected by the campaign will be contacted by the company's dealers starting July 25. The inspection and replacement of the faulty part will be done free of cost.

In May this year, Maruti Suzuki had asked customers of 52,686 Swift and Baleno cars to undertake a service campaign to inspect for a possible fault in the brake vacuum hose. The company, however, said the exercise did not amount to a recall as the issue did not relate to safety.

Automobile manufacturers in India follow a voluntary recall policy adopted by industry body SIAM in July 2012. If a company is of the opinion that there is a manufacturing defect that compromises the safety of vehicles, it rectifies the problem at no cost to the customer.

Maruti Suzuki share price ended the day down by 0.6%.

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