Should you be party to the IPO rush?

Moving in lockstep with Asian markets, D-Street stuttered for the second week in a row with DIIs becoming net sellers for the first time this month since March 2021. Optimism in Indian bourses has also dwindled, with some renowned brokerages downgrading their view on Indian markets due to unfavorable risk-reward ratios. While secondary markets have been struggling, primary markets have been on a roll. With a lengthy list of issues in the pipeline, the IPO market, which has already established a new record with 42 IPOs collecting more than Rs 72,300 crore for the first time in any calendar year, might be on pace to reach the Rs 1 lakh crore milestone.

Given the abundant liquidity, Sebi easing the listing procedure and overall bullish sentiments, the IPO craze is comprehensible. Bull runs in the past have often been accompanied with IPO frenzy. For instance, in 2017-18, there were 81 IPOs/FPOs/OFS worth Rs 98k crore. Coming back to the present, with funds already blocked in secondary markets and IPOs being appealing money-making prospects, it had become advantageous for investors, particularly HNIs, to borrow funds for IPOs at exceptionally competitive interest rates. Investors who leverage their way to IPOs earn only if the company lists at a larger premium as compared to the cost of funding. However, in the second half of 2021, 25 percent of IPOs listed at a discount, resulting in losses for investors and increased risk for financiers. This, along with the RBI’s move to suck up excess liquidity via VRRR auctions, resulted in borrowing costs almost doubling at the moment. As lending rates have risen, HNIs are likely to be more cautious and selective in the IPOs they apply for. Therefore before subscribing, retail investors should analyse not just the potential listing gains, but also the fundamentals and valuations of the IPOs, and seek for solid companies with a compelling long-term structural growth story.

Event of the week

As markets remained volatile, Bank Nifty maintained its early-week gains and crossed the 41,000 level. It did, however, fall in line with other benchmark indices during the week as profit booking halted the rally. With the larger banks reporting their second-quarter results, Bank Nifty remained a focal point as the majority of these behemoths either beat or performed in line with market expectations. Banks’ PAT increased as interest income increased and asset quality improved, which was partially offset by interest rate reversals, increased slippages, and declining margins. In the medium to long term, the banking sector is expected to perform well, as management commentary from majority banks indicated a strong festive season and an optimistic growth outlook.

Technical outlook

Nifty 50 closed the week in red for the second consecutive week. The market breadth remained mostly negative for the entire week with many sectoral indices, including Bank Nifty, facing selling pressure. Although, Nifty did bounce from minor support of 17,600 levels in the last trading session, the sentiment currently seems bearish. The next crucial support level is now placed at 17,250. A decisive break below this level can extend the price and time correction to a couple of days going ahead. As markets are currently standing at critical levels, traders should keep tight stop losses while taking any positions.

Expectations for week ahead

Although the trading week ahead will be shorter than usual, it can undoubtedly be eventful. The news flow and market sentiment may be largely dominated by the upcoming FOMC meeting. While investors appear to have priced in the possibility of tapering by mid-November, the focus will now shift to the timing of interest rate hikes in light of the looming threat of inflation. Indian automakers will report their monthly sales figures. Despite the advent of the festive season, shortages of semiconductors, rising freight and commodity prices may continue to squeeze margins and weaken sales. Nifty50 closed the week at 17,671.65, down by 2.45 percent.

(The writer is Head of Equity Research at Samco Securities. Views expressed are personal)