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May 14, 2018 04:09 PM IST | Source: Moneycontrol.com

FY19 to be good for IPOs, but strong listing gains not a certainty: HDFC Bank

What one has to keep in mind when it comes to IPOs are the valuations at which they take place.

Uttaresh Venkateshwaran @UttareshV

Initial public offerings (IPOs) proved to be extremely popular among unlisted members of India Inc in FY18, and experts believe this trend is here to stay. And what's more, they expect deals to only get larger from here on.

For those of you who missed it, 45 companies raised over Rs 84,000 crore through IPOs in the fiscal year gone by. Investors have found IPOs to be the easiest means to making a quick buck, a belief that has played a significant role in propelling newly-listed stocks in the their first few days after listing.

But what one has to keep in mind when it comes to IPOs are the valuations at which they take place. Plentiful liquidity resulted in strong listing gains last year, and it was not unheard of for an investor to take home 50 percent or more on some occasions.

However, Rakesh Singh of HDFC Bank believes that this should certainly not be the assumption in FY19, given the lackluster show witnessed in some of the more recent IPOs.

"Markets have become more discerning and therefore pricing will have to be reasonable given the rise in volatility. Also one should weigh in the fact that investors have become selective on midcaps," Singh, who is Group Head - Investment Banking, Private Banking, Capital Markets and Financial Institutions at HDFC Bank, told Moneycontrol’s Uttaresh Venkateshwaran.

Among the sectors that seem likely to hit the market, Singh expects companies in the financial services, infrastructure and consumer products segments, with strong growth and earnings, to be in focus.

Edited excerpts...

Q: FY19 saw companies, including SMEs, raise a record Rs 84,000 crore through IPOs. Do you expect FY19 to pan out similarly or will IPOs do even better?

A: The market is seeing a lot more volatility in FY19 and we believe that windows for deals will get shorter as compared to FY18. However, going by the response in FY18, we expect deal sizes to get larger. Inflows of domestic capital remains strong, so opportunities for IPO fund raising will continue.

System deleveraging will continue at attractive valuations and acquirers of assets will raise capital for asset purchases. We believe that we should see another strong year for IPOs.

Q: How do you expect the overall valuation of IPOs to be like? Experts have raised concerns on the pricing of some of the issues we saw last year…

A: The euphoria around valuations from last year seems to be behind us especially around listing gains. Easy liquidity fuelled strong listing gains and this should no longer be the default assumption especially after the tepid performance in some recent IPOs.

Markets have become more discerning and therefore pricing will have to be reasonable given the rise in volatility. Also one should weigh in the fact that investors have become selective on mid-caps.

Q: How should investors, both retail and non-retail, place themselves in a market like this? What should investors consider before parking their funds?

A: Patience is the key in a market fraught with rising volatility, global and domestic challenges. Retail investors should continue to hold SIPs. Large caps continue to build and gain market share. For investors, we would recommend taking some risk off the table and add large caps to the portfolio.

Q: Which sectors do you see dominating the IPO market this fiscal year? Do you also see the number of companies hitting the IPO market increasing?

A: Financial sector, infrastructure and consumer companies with strong growth and/ or earnings continue to be favourable. We do expect some pressure on deals in sectors where companies have failed to deliver earnings or are prone to corporate governance concerns. This is typically seen in a volatile market, where investors become more discerning and selective.

Q: Liquidity has been a point of concern, especially for domestic investors who pulled their money out after February's correction. Do you still expect this trend to continue?

A: One should look at liquidity on two aspects. There are short term traders and then there are those with a long term investment mindset. While the liquidity will get stress tested only now that we are seeing some months of negative returns, our experience suggests that the SIPs will prove to be sticky as the market is maturing. Lump sum investments will see some seasonality and volatility but eventually we expect the market to settle at a rate which is higher than the pre-demonetisation level.

Q: Moving away from IPOs, how do you see the market performing this year? What’s your take on the market’s valuation?

A: On FY19/20, consensus EPS forecast is Rs 600/700 with PE multiple at 18x, we are already more than 1 standard deviation above the long term average. So, if earnings catch up or show strong momentum in that direction, markets will hold. Else markets will correct, show volatility and align to revised expectations. Aspects like elections could also add to the volatility.

Q: Could you highlight major risks that could affect the market this fiscal?

A: Global volatility, reduction in weight of India due to inclusion of China-A shares in global indices, continued oil and metals rally leading to unexpected inflation and current account deficit, rising US interest rates and outflows, domestic politics are major risks.

Domestic liquidity is the largest factor holding up markets. Any significant turn away from equity into debt due to rising rates may impact flows, valuations and appetite for paper.

Q: Do you see the rally in commodity prices, particularly those of oil and metals, continuing? What will rising oil prices do to the market here?

A: Brent forwards still do not reflect continued bullishness. Any upward change in that will negatively impact earnings, lead to inflation, current account deficit, weaken rupee and the outlook for equity markets

Q: How are other assets like gold or bank fixed deposits placed against the market at the moment? What would you tell investors who rushed to buy them after the market’s recent correction?

A: Some diversification would be recommended always after a strong bull run. It is advisable to put funds into income, move to large caps and sectoral funds with strong momentum. With the current rates offered by banks, fixed deposits also seem attractive.

Q: Which sectors do you prefer in this market and why?

A: IT and technology, private financial services companies, consumer discretionary, metals, infrastructure and building materials, entertainment, auto and auto ancillaries. One can add chemicals from a medium term perspective.
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