The week gone by saw two up days and three down days. The BSESENSEX ended with marginal gains of 67.46 points or 0.19% to close at 35,689.60 points. NIFTY was up 4.15 points or 10,821.85 points. A strong rally on Friday managed to see the indices home otherwise we were trailing in the red. Dow Jones had a poor showing with losses of 509.59 points or 2.07% to end at 24,580.89 points. Markets are looking very vulnerable indeed and one hopes and prays that they don’t crack big this week.
On the trade wars front, while talks continue, countries are putting in place their entry barriers against US imports. Even India has retaliated, and the commerce minister is confident that issues will get sorted out. China has put in place tariffs as well. It all boils down to see who blinks. If US blinks it would have to be across nations while if China blinks, global nations would have to follow suit. India is expected to sign big agreements with the US on bilateral trade and hopefully things should be better.
The two issues which were open for subscription last week had a good showing but clearly the one from the PSU stable ran away with the honours. The issue from RITES which was an offer for sale of 2.52 cr shares in a price band of Rs 180-185 was oversubscribed 67.24 times. QIB portion received bids for 71.72 times, HNI portion 194.56 times and Retail portion 15.74 times. There were 13.76 lakh applications.
The second issue was from Fine Organics Limited which was an offer for sale of 76.65 lac shares in a price band of Rs 780-783. The issue was subscribed 8.99 times with QIB portion 12.85 times, HNI portion 21.01 times and retail portion subscribed 1.62 times. There were 2.04 lakh applications.
The difference in subscription levels of the two issues indicates the valuations of the two companies. In the former seeing the performance of some of the recently listed PSU companies like Bharat Dynamics, HAL, GIC and New India, ‘DIPAM’ took a call to offer an attractive price to investors. The immediate response was there for all to be seen. In the case of the latter the issue was more than richly valued, and the response was therefore not over whelming. The business that the company is in, is great and the company excellent, but valuations demanded more than fair. Further for reasons best known to the management they did not finalise results for March 2018. Sources say the results for the March quarter are better than the nine months average, something which is not digestible as why an offer for sale issue where all proceeds are going to the promoters would not take extra effort to declare such results and extract a higher valuation?
The two merchant bankers of Fine Organics Limited were the same which were two of the three merchant bankers of Galaxy Surfactants with ICICI Securities being the additional banker for Galaxy. Galaxy listed at Rs 1,520 and made a high of Rs 1,742 from where it is falling continuously. The share made a low of Rs 1,245 and closed for trading at Rs 1,282 on Friday. The loss so far is over 13% and counting.
There is another IPO opening this week from Varroc Engineering Limited. The company is offering 202.21 lakh shares in a price band of Rs 965-967. The company is in the business of auto components supplying to 2 and 3 wheelers. It also has a very large global lighting business for upper end cars which forms about 65% of its business. The company reported consolidated sales of Rs 10,417 crs for the year ended March 2018. It had an EPS of Rs 33.40 which makes the PE multiple 28.89 to 28.95 times. The company has added new capacity over the last 18 months which would be fully utilised in the coming quarters and thus help the domestic margins to improve from the current 10.62% at the EBITDA level to around 11.5% in the coming 3-4 quarters. The company is also ramping up its lighting business with new facilities which would help these margins improve from 7.75% in March 2018 to around 8.25% in the coming year.
The promoter of Varroc is the twin brother of listed entity promoter Endurance Technologies Limited. This company went public in October 2016 when the company issued shares in a price band of Rs 467-472. Since then in about 20 months the price has increased 2.75 times to about Rs 1,300. The PE based on March 2018 earnings is 46.9 times. While the comparison is being made out it does not suggest that prices would rise in a similar fashion. Suffice to say that shares of Varroc are being offered at a price earnings multiple which is cheaper than what Endurance is trading today.
If one believes in Endurance that the company and its price is sustainable, one must subscribe to the issue of Varroc.
Week ahead sees June futures expire on Thursday the 28th of June. The current value of NIFTY at 10,821.85 points is higher by a mere 85.70 points or 0.79% which is neither here nor there. Bulls were struggling last week and with FPI’s continuing to be sellers there could be pressure in the markets. Global cues too are not very supportive. Use sharp dips to buy select stocks or allow the series to expire.
