Sensex Continues Downtrend; Bank & Metal Stocks Fall

Thu, 30 Nov 01:30 pm

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After opening the day in red, share markets in India have continued to trade in the negative territory and are presently trading in red. Sectoral indices are trading on a negative note, with stocks in the banking sector and stocks in the metals sector leading the losses.

The BSE Sensex is trading down by 290 points (down 0.9%) and the NSE Nifty is trading down by 88 points (down 0.9%). Meanwhile, the BSE Mid Cap index is trading down by 0.3%, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 64.43 to the US$.

In news from stocks in the telecom sector, Bharti Airtel share price is in focus today after Unique Identification Authority of India (UIDAI) has ordered an investigation against the company for alleged violation of the Aadhaar Act.

According to a leading financial daily, UIDAI, which oversees the Aadhaar implementation in the country is said to have slapped a penalty on the company for discreetly opening Payments Bank accounts of customers while carrying out Aadhaar verification of their mobile numbers.

The issue came to light when some customers complained about receiving their cooking gas subsidy - sent under the central government's Direct Benefit Transfer (DBT) scheme - in the Airtel Payments Bank account instead of their designated savings bank accounts with other banks.

They alleged these accounts were opened without their authorisation or knowledge.

At the time of writing, Bharti Airtel share price was trading down by 0.5%.

Telecom Sector: A decade of Underperformance

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.

In news from the IPO space. Srei Equipment Finance, a subsidiary of Srei Infrastructure Finance, has filed draft papers with the markets regulator to float an initial public offering (IPO).

The IPO comprises a fresh issue of equity shares worth Rs 11 billion, besides, Srei Infrastructure Finance will sell up to 4.4 million shares in an offer for sale.

Srei Equipment Finance provides loans for the purchase of equipment for construction and mining, IT infra, healthcare and farm.Earlier in September, Bharat Road Network, a Srei Infrastructure Finance company, got listed on the bourses. Srei Equipment Finance filed its preliminary papers at a time when the capital market is witnessing a spurt in initial share-sales.

2017 will undoubtedly be considered as the year of IPOs. The IPO activity is headed for a record. They have garnered more than Rs 650 billion, surpassing the previous record of Rs 375 billion in 2010. This year, the demand has exceeded expectations.

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.

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.

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

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