Markets ended FY22 on a positive note and this week the India VIX fear indicator fell. Primary markets appear to be getting back to business as D-Street finds stability. While FY22 was a record year for IPOs, the pace is expected to continue in FY23. Thanks to the booming bull market, 74% of the IPOs that hit D-Street in the past fiscal year generated excellent returns that reached up to 270%. However, the real beneficiaries of this IPO mania were the PE/VC investors who managed to cash out a staggering Rs. 827 billion from India’s primary markets, more than multiples of what they pocketed in FY21.
When bull markets bloom, euphoria takes over the primary markets, making it a prime opportunity for promoters and PE/VC investors to demand extravagant valuations for their companies. The greed for quick money is irrational and all investors are rushing to get a piece of the pie at any cost.
What investors fail to grasp is that when circumstances reverse, these companies will fare significantly worse. Despite outperforming the Sensex in FY22, the BSE IPO Index has underperformed by 17% over the past six months.
In fact, currently over 60% of IPOs that came out in FY2021-22 are trading below market price and around 40% even below their issue price, depleting the wealth of investors, especially retail investors.
Acknowledging the pain of retail investors, Sebi has proposed tightening some regulations associated with retaining anchor investors, criteria for offers to sell and pricing for new loss-making ventures. If there’s one takeaway to keep in mind for retail investors starting in FY22, it should be to resist such hysteria.
Rather than fall prey to FOMO, they should analyze each IPO for its own strengths, bearing in mind that overpriced IPOs will most likely be available at a lower price once the frenzy subsides.
event of the week
Mergers and acquisitions (M&A) in India hit an all-time high in 2021 and this week appeared to have set the stage for 2022. Three massive mergers were announced on D-Street, including one in the cinema showroom that gave nearly 2022 merged companies a lion’s market share. The Street reacted positively to all three pieces of news, and the respective stocks rose sharply. It appears that inorganic growth plays and industry consolidation themes are starting to dominate.
In 2021, 60% of transactions were between companies in the same industry. Rather than just growth, the basic purpose of such mergers was to transform a company, achieve significant penetration and scale. Larger corporations, on the other hand, are restructuring their portfolios and expanding into up-and-coming business areas using inorganic means. While FY22 saw the majority of technology adoption, it would be interesting to see how the pattern unfolds in FY23.
Technical Outlook
The market set a few gap-up candles and ended the week in the green despite rather soft global markets. After trading in tight ranges last week, the Nifty Index appeared to have found a cushion around 17,000. With the benchmark successfully breaking above 17,500, the short-term trend remains bullish. Therefore, we suggest traders to maintain a bullish bias aimed at a retest of the immediate resistance zone around the 17,800 level. Drops on the downside are likely to be limited around 17,000 levels.
expectations for the week
The FOMC minutes to be released next week will impact markets globally. At home, RBI’s MPC meeting will be the talk of the town and boost market sentiment. Unlike its peers abroad, RBI has so far prioritized growth over inflation. The shift in macro dynamics caused by the war, the Fed’s planned interest rate hikes and the need to stimulate domestic demand and support budget-indicated increased government borrowing have put the RBI in a difficult situation and all eyes will be on the development of the RBI approach.
These variables, along with the pricing of earnings season expectations, can create nervous swings in our markets. Investors are therefore encouraged to exercise caution before making aggressive bets. The Nifty50 closed the week at 17,670.45, up 3.02%.
Yesha Shah is Head of Equity Research at Samco Securities
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