Sensex Up 1.3%; Consumer Durables Stocks Witness Buying

After opening the day flat share markets in India are trading on a positive note and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the energy sector and stocks in the PSU sector witnessing maximum buying interest.

The BSE Sensex is trading up by 433 points (up 1.3%) and the NSE Nifty is trading up by 143 points (up 1.4%). Meanwhile, the BSE Mid Cap index is trading up by 3.7%, while the BSE Small Cap index is trading up by 3.1%. The rupee is trading at 74.17 to the US$.

In the news from IPO space, Garden Reach Shipbuilders and Engineers, made a weak debut on the bourses today as it opened at a discount to its issue price. The IPO debuted at Rs 104, a 12% discount to its issue price of Rs 118.

The IPO of the company was subscribed 1.02 times and the IPO received bids for 2,97,58,920 shares against the total issue of 2,92,10,760.

Garden Reach Shipbuilders and engineers is a shipbuilding company under the administrative control of the ministry of defense (MoD). The company was incorporated in 1934 and was later acquired by the Government of India from Macneill & Barry Limited on 19th May 1960.

The company primarily caters to the shipbuilding requirements of the Indian navy and the Indian Coast Guard. It is also engaged in engineering and engine production activities.

To know more about the company, you can read our IPO analysis of Garden Reach Shipbuilders and Engineers(requires subscription).

Speaking of IPOs, the stock market is gearing up for a burst of IPO activity.

According to EY India IPO Readiness Survey Report, globally, Indian exchanges recorded the highest IPO activity as the country saw 90 IPO launches that raised US$ 3.9 billion in the first half of this year.

We believe a merit-based selection, primarily including valuation, business, and management quality, is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

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.

Below chart clearly shows the underperformance of IPOs.

IPOs Underperform Broad Market Indices

 

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 banking sector. State Bank of India (SBI) share price is in focus today after if was reported that the state-run banker is looking to buy out good quality loans from non-banking financial companies (NBFCs).

SBI said that it will increase its portfolio purchase of loans from NBFCs this year as it looks to provide the much needed liquidity to the funds starved sector, and simultaneously fulfil its priority-sector obligations.

The bank said that it is looking for opportunities in both the priority and non-priority sectors. SBI said that it had initially planned for a growth of Rs 150 billion through portfolio purchase, but now seeks to enhance it to Rs 200-300 billion.

Reserve Bank of India (RBI) rules mandate banks to lend 40% of their deposits to small businesses, agriculture and home loans under a certain threshold. SBI plans to buy these loans from NBFCs active in this space.

Notably, NBFCs are facing liquidity pressures after infrastructure financier IL&FS defaulted on multiple payments since late August. Defaults by a systemically important NBFC have made investors wary about the sector, raising their cost of funds and making access to liquidity difficult.

SBI's portfolio purchases could add in much needed liquidity in the sector.

At the time of writing, SBI share price was trading up 2.9%.