Markets not yet out of the woods, exercise caution

By Arun Kejriwal

Markets in the week gone by began on an ominous note with sharp losses on the very first day of the week. They ended the week with even more ominous signs, losing 1.5 times more on Friday than what they lost on Monday, and leaving the world guessing what the new week would unfold for markets globally.

BSESENSEX lost 2,528,86 points or 4.24 per cent to close at 57,107.15 points while NIFTY lost 738.35 points or 4.16 per cent to close at 17,026.45 points. The broader markets saw BSE100, BSE200 and BSE500 lose 4.10 per cent, 4.07 per cent and 3.96 per cent respectively. BSEMIDCAP lost 4.14 per cent while BSESMALLCAP was down 2.52 per cent. Markets lost on three of the five trading sessions and gained on two. Interestingly, losses and gains were on alternate days.

The Indian Rupee lost 63 paisa or 0.85 per cent to close at Rs 74.87 to the US Dollar. Dow Jones had a torrid half day on Friday when it lost just over 900 points ahead of Thanksgiving weekend in half a day's trading. For the shortened week, Dow was down 702.64 points or 1.97 per cent to close at 34,899.34 points. At the time of writing this article, Dow Jones futures is down another 185 points.

What has spooked global markets is the new mutant 'Omicron' of Covid-19 found in Africa. Along with this mutant, there has been a spurt in Covid-19 patients in parts of Europe including Austria, Germany and the UK. Cases in the US have been rising rapidly with even deaths. Many countries, including India, are looking at new travel restrictions on international flights.

In India, the number of vaccinations is increasing and have now touched 122.07 crore which include 78.37 crore first dose and 43.69 crore fully vaccinated. This new variant or mutant would bring an awareness to people and hopefully we should see more people getting vaccinated from hereon.

November futures expired on a week note losing 321 points or 1.80 per cent to close at 17,536.25 points. What is disturbing is the fact that the first day of December series has begun with losses of 509.80 points or 2.91 per cent on NIFTY and 1,687.94 points or 2.87 per cent on BSESENSEX.

The primary market saw the issue from Go Fashion (India) Limited get oversubscribed 135.40 times, with QIB portion subscribed 100.73 times, HNI portion subscribed 262.08 times and Retail portion subscribed 49.39 times. This issue is expected to list on Tuesday in the coming week.

There were two issues which listed in the last week. The first was the issue from Latent View Analytics Limited which has become the most subscribed issue in over a decade with oversubscription of 338.51 times. The issue had garnered subscription of Rs 1.13 lakh crore against an issue size of Rs 600 crore. The share which was issued at Rs 197 ended day one at Rs 488.60, gaining 148 per cent. By the end of the week the share had gained further and closed at Rs 695.95 a gain of 253.27 per cent.

The second share to list was Tarsons Products Limited which had issued shares at Rs 662. After a sedate discovered price of Rs 700, the share hit the upper circuit and closed at Rs 840, a gain of 26.89 per cent. In what could be an interesting point to ponder upon, of the 22 shares that have listed from August 16, as many as 10 or 45.45 per cent are trading below the issue price. This clearly shows the fact that pricing of issues by merchant bankers, private equity investors and promoters is taking their toll on the markets.

The first issue to open next week is Star Heath and Allied Insurance Company Limited which is tapping the capital markets with its fresh issue for Rs 2,000 crore and an offer for sale of 5.83 crore shares in a price band of Rs 870-900. The issue would garner Rs 7,249 crore at the top end of the band. The issue opens on Tuesday the 30th of November and closes on Thursday the 2nd of December.

The company which is into health insurance is the largest private sector player, but reported losses for the year ended March 2021 and the half year ended September 2021 as well.

The company in the current year would be unable to turn back into profits because of the claims made on account of Covid-19. Further, the claims on account of other diseases which are seasonal and viral in nature like dengue, chikungunya and malaria will cause a hole in the balance sheet of star health. I believe the company at the current rate may not make profits even in FY 23. The PE for the stock is infinite and even the NAV as on 30th September is Rs 57.83. The issue is expensive and investors should spend the Rs 14,400 that they would have applied in the share to buy health insurance for Covid-19 and the other diseases. This would be far for rewarding as health would be protected, and health is wealth.

The second issue is from Tega Industries Limited which is tapping the capital markets with its offer for sale of 1,36,69,478 shares in a price band of Rs 443-453. The issue would garner 619 crore at the top end of the band. The issue opens on December 1 and closes on December 3. The company is in the business of manufacturing recurring consumable products used in the mining industry and is a sizable player in this field. The company has three plants in India and three abroad in Australia, Chile and South Africa.

The company reported an EPS of Rs 20.48 on a fully diluted basis for the year ended March 2021. The PE multiple for the company at this EPS is 21.63-22.12. The nearest comparable for the company is a player known as AIA Engineering who makes similar equipment used by cement plants while Tega does this for the metals mining industry. The private equity investor Wagner is exiting the company after 10 years and would be making a return of 2.62 times. Considering the returns that one is seeing private equity players make and the way fortunes of the mining industry have changed, one believes the returns are sub-optimal. Take a measured call on investing in the company.

Coming to the week ahead, markets would be choppy, volatile and more importantly, circumspect. While FII's have been selling aggressively in the secondary market, the spate of IPO's seems to be never ending. Markets need to stabilise and get over the fear of valuations, Covid-19 new strain, FED interest rates likely to increase and a host of smaller issues before sanity returns. The fact that we saw oil prices fall close to 10 per cent is also not good for the present state of global markets.

It makes sense to keep cash on hand and indulge in some bargain hunting from the large cap stocks only. Use any rallies which happen which may be classified as corrective or dead cat bounce to sell into and book profits. However, refrain from shorting as the current badly mauled bull would look to retaliate. Allow the markets to consolidate and find new levels of stability before making new commitments.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are personal)

Source: IANS