Market would be hard pressed for liquidity

The week gone by has been a crazy and super-volatile one. We began the week with the Sensex gaining over 600 points on Monday. The next two days were marginally negative and we had a dip on Thursday. Friday was another big fall and the Sensex lost a whopping 500 points, ending the week with losses of 131.14 points, or 0.40 per cent, to close at 33,176 points. The Nifty lost 31.70 points, or 0.31 per cent, to end at 10,195.15 points. What is significant is that the gain on Monday is the highest in about 18 months, and the loss on Friday is almost the highest in calendar year 2018 and similar to the loss on February 6, 2018.

Futures for March 2018 would expire on Thursday, March 22. The current value of the Nifty is at 10,195.15 points, which is lower by 187.55 points, or 1.84 per cent, than the close of the February series. With so many cross currents and head winds that the market is facing, it appears that the bears have an upper hand in the current series.

The week gone by saw the primary issue from Bharat Dynamics close for subscription. The issue was oversubscribed 1.3 times with the QIB portion subscribed 1.50 times. HNI undersubscribed at 0.50 times and retail subscribed 1.41 times. The average value of the retail subscription was significantly higher than the norm at roughly 13 lots against the conventional sub-two lots. This clearly shows those who applied were aware of the subscription being muted.

The week ahead belongs to the primary market and there are issues opening galore. The issue from Bandhan is on and would close on Monday. The issue is subscribed 0.88 times and would see the HNI demand coming in on Monday in a big way. The interest rates have moved up on leverage to 6 per cent with a margin payment of 3 per cent. This would make the cost of funding at about Rs 0.43 per time per share for the leveraged investor. The issue is expensive but looking at the massive response from the anchor investors the same would see HNIs lapping up the issue. 

The second issue which has opened and is due for closing on Tuesday, March 20 ,is from Hindustan Aeronautics, the PSU which makes fighter aircraft and helicopters. The issue has a price band of Rs 1,215 to 1,240 with a discount of Rs 25 for retail and employees. The issue size is 3.41 crore shares. The price-earnings multiple based on March 2017 numbers is 16.64 to 16.99 times, its EPS of Rs 73. The one big issue in the case of HAL is that though tit has just won an order of 320 aircraft for Tejas, at the proposed ramp-up of capacity from eight aircraft to 16 that the company is planning, it would still take 20 years to execute the order. This could be a big negative for the star defence PSU.

The next issue is from auto component-maker Sandhar Technologies, which opens on Monday, March 19 and closes on Wednesday, March 21. The issue consists of a fresh issue of Rs 300 crore and an offer for sale of 64 lakh shares in a price band of Rs 327-332. Based on annual results for March 2017, the PE multiple is a steep 42.69-43.34. Looking at half year September 2017 results and annualised EPS of Rs 6.69, the price-earning multiple reduces significantly to 24.43 -24.81 times. These higher earnings are for plants that have recently come into production and reached critical mass and cash breakeven.

The next issue is from defence PSU, Mishra Dhatu Nigam, or ‘Midhani’. The company is a niche player and makes titanium and super-alloys for the aerospace and space programmes and supplies to defence and power plants. The company is issuing 4.87 crore shares in a price band of Rs 87-90 with a discount of Rs 3 for retail and employees. 

The company had earned an EPS of Rs 6.74 for the year ended March 2017. The company proposes to begin manufacturing at Rohtak ‘kavach’ or bulletproof jackets and armament steel for vehicles and tanks to make them that much safer from attacks. The company has a large number of niche players in HAL, Bharat Dynamics and Isro amongst others. 

There is a small issue from Karda Construction, which is a builder from Nasik in Maharashtra. The company is tapping the market with a fresh issue of 43 lakh shares in a price band of Rs 175-180. The price-earnings multiple based on March 2017 numbers is a steep 21.79-22.42 based on earnings of Rs 8.03. Considering that Nasik is a tier-2 city, valuations look expensive.

The final issue for the week is from ICICI Securities, which is offering for sale 7.72 crore shares in a price band of Rs 519-520. The earnings for the year ended March 2017 were at Rs 10.48 which puts the price band at 49.4-49.5 times. The earnings for the first nine months ended December 2017 were at Rs 12.39 which if annualised comes to Rs 16.52. The PE multiple at these earnings is 31.41 to 31.47. The company is promoted by a bank and therefore, unlike its peers in the broking fraternity, does not have an NBFC arm. The NBFC arm of brokers like Edelweiss, Motilal Oswal and IIFL have large incomes from lending against shares, margin funding and also IPO financing. ICICI Securites has begun margin trading and may push this product going forward. Its digital platform ICICI is a market leader and enjoys premium status with its three-in-one account, which includes trading savings account and demat account.

The large number of offerings from private equity investors is to cash in on the long-term tax gains which would expire on March 31. Whether ICICI Bank would be able to cash in on the same or not is highly doubtful, as it needs to get confirmations from all collecting banks within one day. I am sure people at ICICI Bank would have long weekdays starting from Monday to Wednesday in getting all paperwork completed.

With a spate of issues in the last fortnight of the year the market would be hard pressed for liquidity. March futures expiry would be yet another cause for concern. The market is likely to be under pressure till expiry and there could be some respite from Friday onwards. Trade cautiously and use sharp dips to buy.

 (The author is founder, Kejriwal Research and Investment Services)

Arun Kejriwal