Moneycontrol Pro Panorama | Investors eyeing quick bucks in IPOs should not throw caution to the winds

Whether the IPO enthusiasm will be shared by other investors is the question now, and that will determine the future market direction.

Dear Reader,

Sometimes timing is all that matters. Look at the latest crop of IPOs. Companies are raking in the moolah in the primary market, thanks to upbeat market sentiments and strong participation by retail investors. Grey market premiums of upcoming public issues, including Orient Technologies, Premier Energies, ECOS India Mobility, Bazaar Style Retail, and Bajaj Housing Finance, indicate a strong listing, reports Moneycontrol.

Retail investors are lured by quick bucks (listing gains) and potential long-term returns. But amid the stock market frenzy, retail investors are not giving enough importance to valuations and potential risks. Take the case of Premier Energies. The IPO of the solar module manufacturer, which opens on August 27, is being sold at 36 times FY25 estimated earnings, as per our Research Team’s calculations. You can read the full analysis of the Premier Energies IPO here.

Ahead of the IPO, the company raised money from anchor investors and going by the grey market premium the public issue may also see good retail participation.

Still, amid the rapidly changing global solar equipment market one cannot help but wonder if it is prudent to pay such a high valuation for Premier Energies. The Nifty 50 index which largely constitutes blue-chip companies is trading at 23 times FY25 earnings estimates.

Of course, Premier Energies is in a booming solar industry. However, globally the industry is saddled with excess capacity. Solar module prices are in a downtrend. The sector in India is insulated to some extent by government tariffs and non-trade barriers such as compulsory procurement from domestic manufacturers by state owned entities. But that ties the company’s fortunes to tariffs, trade relations and government support. Premier Energies is heavily reliant on imported raw materials, particularly from China.

Notably, past experience shows that solar equipment manufacturers are highly susceptible to rapid technological changes. China, which dominates global solar equipment manufacturing, enjoys high-cost advantages and is ahead in investments. Keeping up with global majors can be a challenging task.

As it turns out Premier Energies managed to improve its financial performance in FY24. Even so, investors should keep a wary eye on profit margins, which face pressure from competition and constant price erosion.

In fact, retail investors are not just propping up IPOs, they are also at the forefront of the recent up-move in the broader markets. An analysis by our columnist Vijay L Bhambwani indicates heightened buying by retail traders.

“As a matter of fact, the market wide position limits (MWPL) are now at multi-year highs thanks to retail buying. Since retail traders are the weakest hands in the market, financial asset prices are being propped up by the weakest hands in the market,” writes Bhambwani. Whether the enthusiasm will be shared by other investors is the question now, and that will determine the future market direction. You can read his column here.

What politicians forget in the immigration balancing act (republished from the FT)

Technical Picks: Reliance Industries, National Aluminium, Indian Hotels and Prestige (These are published every trading day before markets open and can be read on the app).