Several opportunities but volatility ahead

The Market continued to remain under pressure and gained momentum in the fall during the week. The Sensex lost 966.32 points or 2.82 per cent to close at 33,349.31 points. The Nifty lost 273.55 points or 2.65 per cent to close at 10,030.00 points. The broader markets saw BSE100, BSE200 and BSE500 lose 2.55, 2.48 and 2.57 per cent respectively.

The Dow Jones too was under pressure and lost 756.03 points or 2.97 per cent to close at 24,688.34 points. The rupee was volatile and at close lost 14 paisa or 0.19 per cent to close at Rs 73.46 to the dollar. October futures expired on a weak note with the Nifty losing 852.65 points or 7.77 per cent to close at 10,124.90 points. There was a sharp decline all through the month and bears were on top of the series throughout.

The current level of the Sensex at 33,349.31 points is down 707 points or 2.12 per cent on a year-to-date basis considering close of December 31, 2017. What is worrisome is the fact that it is down 5,640 points or 16.91 per cent from the high of the year of 38,989 points made in August. Similar levels for the Nifty are 500.70 points or 4.99 per cent on a year-to-date basis and 1,730.20 points or 17.25 per cent from the August high.

The Mid-cap is down 28.49 per cent on a year-to-date basis while Small Cap lost 41.43 per cent. Even Dow Jones is down and its current level of 24,688.34 points is a loss of 1,928.37 points or 7.31 per cent from the high and is virtually flat on a year to date basis, down 30.91 points. The trade war is hurting all the countries no doubt.

The Bandhan Bank has been falling ever since RBI froze the salary of the promoter CEO and permission to open new branches until the bank reduced the promoter holding as mandated. The share price briefly during the week went below the issue price. Two other small finance banks had a similar sell off when RBI said that the permission to reduce promoter holding would have to be complied within the given period.

These two microfinance companies turned into small finance banks were at the centre of selling on Friday and tumbled. The two shares in question were Equitas Holdings and Ujjivan Financial Services. The Equitas Holdings was listed in April 2016 and issued shares in a price band of Rs 109-110. The share had made a high of Rs 173.65 and a low of Rs 77.85. In the week gone by the share closed at Rs 99.05, a loss of Rs 26.75 or 21.26 per cent. The Ujjivan was listed at around the same time and had offered shares in a price band of Rs 207-210. The share had made a high of Rs 434.75 and made a low of Rs 166.50. The share last week lost Rs 49.30 or 21.39 per cent to close at Rs 181.15.

Both shares and Bandhan Bank have seen severe pressure. The two microfinance companies converted into Small finance bank (SFB) saw pressure for the first time on Friday after RBI clarified that they would have to list the bank and dilute the promoter holding within three years of listing. This period expires at the end of April 2019. RBI has only shown the rule book and done nothing else. The market reacted quite sharply and there would be more pain to follow in the coming weeks.

The merchant bankers of the two companies during their respective road shows never highlighted the risks associated with these companies with respect to the dilution and the RBI guidelines. There are currently two different issues with which these companies are grappling. The first is the fact that the conversion from a microfinance company to a small finance bank entails upfront expenditure of branches where most are new branches, and some are conversion from existing microfinance to bank branches. The second is on expenditure related to software and other related expenses of a bank. Against this the major advantage of ‘casa’ where the bank gets cheap deposits takes much longer to flow in. These companies would now have to list the bank or the entity in which the banking activity is done and ensure that the same had dilution of promoter equity.

The AU Small Finance Bank, which is yet another company to list in recent times, also saw large value destruction. This is not to exclude the general carnage that one is seeing in the NBFC space and the destruction in share price of Yes Bank which was down another 17.06 per cent at Rs 180.55. Indusind Bank too joined the affected list after the exposure to IL&FS was disclosed and lost 8.37 per cent at Rs 1,445. The share had made a 52-week high of Rs 2,038. The share is trading at around its 52-week low.

The week ahead would continue to remain super volatile and choppy. While technically a bottom is not yet made, it can happen any time soon. There would be a sharp and swift rally from there even though it need not be a very long one. There would be a couple of attempts made at testing and confirming the bottom formation process. Would therefore be prudent to adopt a trading strategy to buy into weakness and use sharp rallies to sell. One would get several opportunities to do so going forward.