Early signs of cracks appearing – Book profits

The markets continued to make new highs and NIFTY crossed the magical level of 10k.This week the market gave signs that the momentum is stalling and a larger correction is in the offing sooner than later. The BSESENSEX gained 280.99 points or 0.88% to close at 32,309.88 points while NIFTY gained 99.25 points or 1% to close at 10,014.50 points. The broader market too registered gains of between 0.90% and 1.00%.

NIFTY futures for July expired with decent gains of 516.45 points or 5.43%. Bulls were seen struggling on expiry day in the last hour and were unable to press home the advantage. This gave an indication of things to come and markets were slightly weaker on Friday. The midcap and smallcap segments have been seeing profit taking for the last couple of days and it is likely to continue in the coming week as well.

RBI meets for its bi-monthly policy review meet this Tuesday and Wednesday the 1st and 2nd of August where it is widely believed that there would be a rate cut. Inflation has never been so soft and benign and this is the best chance for a rate cut. The optimists are hoping not only for a rate cut but an over optimistic cut of 50 basis points. Whether it would happen or not one is not sure but going forward rate cuts would not be easy with the Fed deciding to shrink its balance sheet and maintain a tight interest rate regime. In such a scenario interest rates may not soften in India going forward post this cut.

There are two IPO’s in the coming week. The first is from Cochin Shipyard which is raising roughly Rs 1,470 crs through a simultaneous offer for sale by the government of India and a fresh issue of 339.84 lakh shares in a price band of Rs 424-432. There is a discount of Rs 21 for retail and employees. The issue is being offered at an attractive multiple of 15-16 times its FY March 2017 earnings. The company is building India’s first indigenous Aircraft carrier. Newspaper reports and the CAG peg the cost of the same at roughly 3 billion dollars. The company has billed so far Rs 7,000 crs for the ship and roughly Rs 12,000-13,000 crs would be billed over the next four or five years. Even though this is majorly to be bought out there is a handling fee which would be earned by the dockyard.

Besides the shipyard, the company is in two more verticals which are ship repair and training and laboratory services. Ship repair is a very high margin business and the company is expanding its activities by adding a new repair facility and also building a new dry dock. The new facility will sufficiently ramp up the capability and capacity of handling substantially larger ships and vessels and make Cochin shipyard a preferred vendor for new ship and repair facility.

Going forward I am sure that the government with its make in India initiative would order further aircraft carriers from Cochin shipyard rather than buying older ones and then refurbishing them. The issue is a must subscribe.

The second issue is from Security and Intelligence Services (India) Limited. The company is tapping the capital markets with its simultaneous offer for sale and fresh issue to raise Rs 775-779 crs in a price band of Rs 805-815. The PE of the issue is a staggering 61.78 times to 62.55 times based on consolidated earnings for the year ended March 2017. The company earns over 86% of its total revenues from security services and is primarily based in India and Australia. Its operation in Australia is bigger than India which 60% of the revenues from security services coming from Australia and 40% coming from India. Its net margin is just under 2%. The valuation at which the shares are being offered leave little or no scope for appreciation for the investor. Further the retail portion is a mere 10% of the issue size and makes allotment that much more difficult.

With both issues back to back, it makes sense to just apply for Cochin Shipyard and ignore the second.

With RBI policy due on Wednesday and markets showing early signs of cracking, keep on the sidelines and book profits.

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