Buoyancy in IPO market eroding money from weaker sectors?

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The market capitalisation of six of the 10 most valued companies saw their market valuation erode by Rs 76,640.54 crore last week. Of the list, Reliance Industries, HDFC Bank, HUL, HDFC, State Bank of India and Kotak Mahindra Bank witnessed erosion in their market capitalisation. with HDFC Bank emerging as the biggest laggard.

The market valuation of HDFC Bank tumbled Rs 43,578 crore to reach Rs 7.97 lakh crore. HUL saw its market capitalisation erode by Rs 13,004 crore to Rs 5.54 lakh crore. The valuation of Reliance Industries dropped by Rs 4,184 crore to Rs 13.3 lakh crore and that of SBI by Rs 937 crore to Rs 3.8 lakh crore.

HDFC’s valuation plunged Rs 9,543 crore to Rs 4.48 lakh crore and that of Kotak Mahindra Bank dipped Rs 5,392 crore to Rs 3.4 lakh crore.

What has led to this fall ?

Sudip Banyopadhyay, Group Chairman at Inditrade Capital said, “The buoyancy in the IPO market has contributed to an extent to the flight of money from the weaker sectors of the market to the exciting new IPOs. Historically, large IPOs result in temporary upheavals and liquidity challenges in the market. However, these are not permanent or even medium term”.

While Gaurav Garg of Capital Via Global Research said, “Domestic institutional investors have been very active in the IPO segment but all the money going to IPO rush is not entirely true.”

He said, “Among these six company in terms of market capitalization HDFC twins shed most, followed by Reliance and TCS. What led to this sharp correction is the subdued quarterly results especially by HDFC Bank when the street was expecting better results. Provisions and gross NPAs came in at 1.47% compared with 1.3% in the March quarter which has caused a major worry. Also, the guidance was not very positive either. Hence, there has been a sharp correction.”

On the impact on banking and financial services stocks, Bandyopadhyay believes that the significant correction during the past few trading sessions was predominantly on account of the second wave induced lockdowns which lead to significant difficulties in collections which in turn led to deterioration in asset quality.

“The lockdown resulted in extremely slow and cautious credit growth and disbursals which affected income and profitability. Insurance companies were also affected due to significant surge in claims on account of the second wave. This  resulted in subdued financial performance in Q1 and consequent corrections in the segment”, he added.

The other major reason pointed out by experts is the relentless selling by foreign investors. FIIs have been net sellers in past few months, it looks like they are booking profits as Nifty is on higher levels and waiting for opportunities once the earning season is over.

However, experts believe this fall will not last long. Gaurav Garg believes all the companies have proven track record of strong performance and investors, with long-term outlook can take this opportunity to accumulate these stocks.

What should investors do ?

“One can hold positions in HDFC twins and TCS as their could be a bounce from these levels and one can also think of entering HDFC Bank on Corrections. On the other hand he recommends short-term investors to exit RIL as the stock may consolidate”, said Garg.

Sudip Bandyopadhyay believes there is very little concern overall. Gradual reopening of the economy once again has brought back buoyancy and we are looking at the prospects of rapid growth for the banking and financial sector.