Increased volatility to shake weak hands

Markets showed signs of nervousness on Thursday and Friday last week. They were weak and while one could understand that on Thursday it was on account of expiry, the same could not be said of Friday which was the first day of a new series. The weekly loss on the BSESENSEX was 846.30 points or 2.58% at 32,832.94 points. The loos on NIFTY was 267.90 points or 2.65% for a weekly close of 10,121.80 points.

November futures expired on a weak note losing 117.25 points or 1.15% at 10,226.55 points. Open interest for December is at Rs 1,36,645 crs against Rs 1,36,265 crs, a change of Rs 380 crs. Nifty Futures is lower by Rs 6,266 crs at Rs 22,073 crs while stock futures are higher by Rs 6,646 crs at Rs 1,14,572 crs. This negates the impression one had that futures rollover was lower.

GDP for the quarter ended September 2017 was higher at 6.3% after five consecutive quarters of weakness. This performance should be viewed in light of the fact that GST rollout happened in this quarter. While one quarter many not be enough, it still indicates that things are falling on track after a very long time.

The week ahead sees RBI meet on Wednesday the 6th of December for its Monetary Policy Review where it is widely expected that rates would remain unchanged. The only thing of interest would be to see what stance RBI takes on GDP, inflation and the commentary on the fiscal deficit. The surprise could be a minor change in CRR in case they decide to suck out some liquidity from the system.

One thought that the primary market after having a fantastic fund raising in calendar year 2017 had shut for the last month. I was proved completely wrong. We have two issues this week. The first is from Shalby Limited which is looking to raise Rs 480 crs from a fresh issue and an offer for sale of 10 lakh shares in a price band of Rs 245-248. The company operates super speciality hospitals and is spearheaded by Dr Vikram Shah the famous knee replacement surgeon from Ahmedabad. The company has started an asset light model where they fit out the hospital and acquire the land on long lease and in some cases also get the building on lease. The options are varied and depend on case to case basis. Payments for the land and building are linked to revenue share further reducing the time to become EBITDA positive. Theissue has a valuation of 34.22-34.64 times its fully diluted and consolidated results for the year ended March 2017. The company would raise Rs 504.8 crs at the top end of the band. The issue opens on Tuesday the 5th of December and closes on Thursday the 7th of December.

The second issue is from Future Supply Chain Solutions Limited which is entirely an offer for sale from the promoters and shareholders of the company. The issue is for 97.84 lakh shares in a price band of Rs 660-664 and would open on Wednesday the 6th of December and close on Friday the 8th of December. The valuation of the share looks stretched beyond the current range of 43 to 50 which had become a benchmark. The PE of this company based on the fully diluted EPS for the year ended March 2017 is a steep 58.72-59.07. The track record of the Future group with the two issues that they had done in January 2008 as Future Capital Holdings Limited a NBFC was a complete disaster. Shares were issued at Rs 765 and were finally sold as a block deal to what is now Capital First at Rs 240. The timing of the issue then was ominous with the Lehmann Brothers crisis and the timing now gives one the shivers. One needs to be careful of such steep valuations.

The second issue was from Future Ventures which was done at par and remained around that price or below for a long time. After multiple rights and various mergers and demergers, this company in its present shape and size is being listed as Future Supply Chain Solutions Limited whose anchor customer is the future group and about 2/3 of the business handled is from the Future group. One cannot be sure what arm’s length distance is maintained in commercial terms by the group. With such an expensive valuation, poor track record of the group and lack of governance, it makes imminent sense to simply give this issue a slip.

Markets will continue to be choppy and the crucial date as mentioned last week is the 18th of December where one would see a blow off or a meltdown. Play and plan your strategy accordingly and use sharp rallies or dips to exit or enter the market.

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