Market volatility and surfeit of primary issuances to dominate markets

Markets have a mind of their own and when at the end of the previous week, a new high on the benchmark indices looked a certainty, they decided to correct themselves. BSESENSEX lost on four of the five trading sessions and lost 388.96 points or 0.73 per cent to close at 52,586.84 points. NIFTY lost 61 points or 0.39 per cent to close at 15,763.05 points.

The broader indices saw BSE100, BSE200 and BSE500 lose 0.44 per cent, 0.27 per cent and 0.14 per cent respectively. BSEMIDCAP gained 0.29 per cent while BSESMALLCAP gained 1.36 per cent respectively. What is interesting is the intraday low made on Wednesday which was significantly lower and the turnaround indicates that we have some steam left in the markets. The lows made were 51,802 points on BSESENSEX and 15,513.45 points on NIFTY. Both these levels are significantly lower than the recent lows.

The Indian Rupee lost one paisa or 0.01 per cent to close at Rs 74.41 to the US Dollar. Dow Jones lost 126.08 points or 0.36 per cent to close at 34,935.47 points. Incidentally, Dow made a new lifetime high and also lifetime closing high during the week. Lifetime intraday high was 35,172 points, while the closing lifetime high was 35,145 points.

July futures expiry which was of five weeks duration, expired virtually unchanged. The net series change was a mere 12 points loss or 0.08 per cent. The series expired at 15,778.45 points. This kind of series end has not been witnessed for a very long time. Considering the fact that FPI’s have been net sellers in the series, this close clearly indicates that bullish bets have been rolled over and markets are likely to gather steam and pace as the series progresses. Gains may not be registered immediately, but should happen as the month progresses.

Action in the primary markets continues unabated. The week gone by saw one IPO list and two primary issues open and close for subscription. The issue to list was from Tatva Chintan Pharm Chem Limited which had issued shares at Rs 1,083. Shares debuted at Rs 2,111.80 and closed at Rs 2,310.25, a gain of Rs 1,227.25 or 113.32 per cent. Shares on Friday closed at Rs 2,268.50, losing Rs 41.75 compared to the opening day.

The primary issue of Rs 1,060 crore from Glenmark Life Sciences Limited and an offer for sale of 63 lac shares was oversubscribed 45.08 times. The price band was Rs 695-720. The company created a new record in terms of subscription as it received 39.5 lakh applications beating the previous record of 32.44 lakh shares received in Tatva Chintan.

The second issue from Rolex Rings Limited which had tapped the capital markets was subscribed 130.44 times. The company had tapped the markets with its fresh issue for Rs 56 crore and an offer for sale of 75 lakh shares in a price band of Rs 880-900. The company received 34.89 lakh applications.

The response that companies are receiving from retail investors is scary and is allowing promoters and merchant bankers to raise the PE multiples to never before valuations. When the applecart will be overturned is not sure but a couple of poor listings will do the trick. Caution would be the buzz word and investors should get worried about valuations and stop following the mad race being witnessed.

The week ahead sees the onset of 4 issues tapping the capital markets. All four of these issues would open on Wednesday the 4th of August and close on Friday the 6th of August. What is so special about these dates, no one knows. However, it is very clear that no one wants to miss the bus and everyone wants to catch the early worm.

The first issue is From Exxaro Tiles Limited which is tapping the markets with its fresh issue of 111.86 lakh shares and an offer for sale of 22.38 lakh shares in a price band of Rs 118-120. The EPS for the year ended March 2021 is Rs 4.54. The PE of this ceramic tiles maker from Gujarat would be 25.99-26.43 times.

The second issue is from CDMO and CRO pharmaceutical manufacturer from Dehradun Uttarakhand, Windlas Biotech Limited. The company is raising a fresh issue of Rs 165 crore and an offer for sale of 51.42 lakh shares in a price band of Rs 448-460. The company had declared an EPS of Rs 8.70 for the year ended March 2021. The PE for the issue is in a band of 51.49-52.87 based on March 2021 results.

The third issue is from diagnostic, pathological laboratory and radiology company, Krsnaa Diagnostics Limited. The company is tapping the markets with its fresh issue for Rs 400 crore and an offer for sale of 85.25 lakh shares, in a price band of Rs 933-954. The EPS on a fully diluted basis is Rs 12.25 and the PE multiple is an unprecedented 76.16-77.88 times. The benchmark valuation keeps on rising with investor participation.

The fourth and final issue is from QSR (quick service restaurant) chain, Devyani International Limited, which is tapping the capital markets with its fresh issue for Rs 440 crore and an offer for sale of 15.53 crore shares in a price band of Rs 86-90. The company has been reporting losses and has the potential to turn the corner in some time once the pandemic is behind us. Currently, the company is loss making and therefore has no EPS and PE becomes irrelevant. Looking at the recent success of Zomato which is a delivery platform only and is a massive loss-making company, yet enjoys an unprecedented valuation of over Rs 1 lakh crore, there is expectation of this becoming another blockbuster issue.

Looking at the primary market enthusiasm and just virtually companies tapping the markets at will, and with just about any valuations, one needs to get cautious and wiser to the ground reality.

On the Covid-19 front, the world saw 19,85,65,252 patients, 42,33,174 deaths and 17,92,94,792 patients recovering. In India we saw 3,16,55,824 patients, 4,24,384 deaths and 3,08,20,521 patients recovering. Compared to the previous week, the world saw 41,39,771 new patients, 64,460 deaths and 28,05,519 patients recovering. In India we saw 2,83,933 new patients, 3,791 deaths and 2,77,383 patients recovering. We still have some states where the new patients’ numbers are still large. We probably will have to live with this till our vaccination drive covers over 100 crore people.

Coming to the week ahead, markets will be volatile and range bound. The levels of 53,000 and 16,000 are very crucial for any sustainable up move. Currently they appear to be very strong resistances and there have been more than a couple of instances when it appeared that this resistance would be broken upwards and markets have fallen instead. On the downside markets have strong support around the 52,250 and 15,700 levels and unfortunately both these levels were violated on the downside last week. This makes us believe that markets have a mind of their own and would make predictions that much more difficult.

The last fortnight of results is on and probably markets would ride out this time without any major movement. RBI would meet during the latter half of the coming week for its bi-monthly monetary policy review meeting where key interest rates are likely to be kept unchanged. The key takeaway would be the commentary on inflation which has risen in recent months and RBI’s view on interest rates going forward.

As far as the trading strategy for the week ahead is concerned it would be the same as the previous week. Continue to sell on strong rallies and buy on sharp dips. Enough trading opportunities would be available. It’s time to become choosy and let go of stocks where valuations defy logic. Be conservative and look for safety in large cap stocks.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)