Grey market premium highly unreliable, irrelevant; check these 2 things while applying for IPO | INTERVIEW

With a flurry of IPOs in March, it has been a busy month for Dalal Street. But while some initial public offerings brought in listing gains bonanza for investors, others disappointed the allottees, rudely revealing the disconnect with the prevailing grey market premiums. For instance, recently listed Easy Trip Planners got subscribed 159 times and was quoting a strong grey market premium. But on debut day, it listed at a weaker-than-expected level. So, how should an investor study a company before applying for its IPO? Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities, told Surbhi Jain of The Outlooker Online that while applying for an IPO, one must keep in mind that grey market premium quotes are highly unreliable and quite irrelevant for long-term investments. For the new financial year, Devarsh Vakil feels metal stocks have more upside left. One should also look at the PSU sector, as progress on disinvestment and privatisation may keep this sector in limelight in the new fiscal year.

1. With so many IPOs in March, do you think grey market premium should be considered while applying?

Whether it is a new secondary market investment or applying for an IPO, one should look at three parameters — growth potential of the business, quality of the management and financial health and valuation. The grey market premium quotes are highly unreliable and quite irrelevant for long term investments.

2. Where do you see Sensex, Nifty and Bank Nifty in the new fiscal year, keeping in mind the rising COVID cases, bond yields and ongoing vaccination drive?

After suffering from the Covid-19 pandemic induced slowdown, economic activity is slowly picking up and it is expected to recover sharply in the financial year 2021-22. The Reserve Bank of India has kept loose monetary policy and managed well to keep borrowing cost relatively lower for corporate India. The government has decided to support GDP growth by provisioning for higher capital expenditure in the union budget. We believe this new economic growth cycle will last for next few years.

As a larger part of the population gets inoculated against the Covid-19, the economic recovery will pick up pace. Investors anticipate future earnings growth and discount them in advance by valuing it at an appropriate interest rate. Global markets recently underwent a correction due to a spike in US bond yields (spiked over 50 bps since January-end). High flying growth stocks looked vulnerable compared to cyclical and value stocks. All bull markets pass through many small and large corrections on the way. There is some more room for benchmark indices to correct, but we believe Indian stock markets are headed higher on back of earnings growth over the longer term.

3. Do you think momentum in midcaps and small caps will continue in next fiscal and why?

Mid Caps and small caps companies will benefit from lower funding costs and a recovering economic cycle. Higher business growth prospects and better profitability has excited investors to hunt for opportunities in mid and small cap space. As far as valuations are concerned, mid-caps are now as expensive as large caps. Hence, returns will be moderate and in line with earnings growth.

4. What are your overweight and underweight sectors for FY22 and why?

The pharmaceuticals and Information Technology sectors are the leaders of this rally. Government policies like Atma-Nirbhar Bharat and PLI schemes offer unique opportunities for manufacturing firms to grow their businesses. We believe metals have more upside left. PSU as a theme will be in the limelight this year based on the progress on divestment and privatization. Banks, Auto sectors may find it difficult to rise materially and may underperform for a while.

5. What factors would drive the stock markets and what are the key risks?

Stock prices are slave to earnings. Investors anticipate future earnings growth and discount them in advance by valuing it at an appropriate level. Global liquidity contraction due to reversal of quantitative easing (QE) by central banks; faster-than-expected increase in inflation will force policymakers to raise interest rates. If bond yields rise substantially from current levels, that could be the party pooper for stocks markets. Many pension funds and endowment funds redeem their funds from equity markets and put it into bonds. Apart from this, in India, we have the added uncertainty of the monsoon and the upcoming assembly elections.