It’s interesting to note that when all the action in a particular week happens on the last trading session of the week, the following week sees action in the opposite direction. This time around the same is likely to happen as well. BSESENSEX gained 1,289.57 points or 1.59% to close at 82,408.17 points while NIFTY gained 393.80 points or 1.59% to close at 25,112.40 points. BANK NIFTY gained 725.50 points or 1.31% to close at 56,252.85 points. It would be interesting to note that of the 1,289 points gain for the week, 1,046 points or 81% came on Friday for the BSESENSEX. Similarly, of the 393 points, 319 points or 81% of the gains on NIFTY came on Friday. The geopolitical scenario since trading closed for the week in India has undergone a sea change to warrant any up moves on Monday.
US President who was aspiring to be nominated as Nobel Peace prize winner and falsely claimed to have brokered peace between India and Pakistan in their four day skirmish, launched an attack on Iran’s nuclear facilities. Even if he is at some point of time able to bring Russia and Ukraine to the table and sign a declaration of peace, his dream of emulating President Obama who won the 2009 Nobel Peace Prize stand shattered. This would also delay the possibility of 25,150-25,200 on NIFTY being violated and sustained. Effectively the markets have been lulled into yet another round of building steam, momentum and making the dash to cross this hurdle, which gets even stronger as attempts are made and fail.
Apologies for not giving details on market movements as my computer crashed and I am getting permanent alternate arrangements made. In the meanwhile am making good with borrowing a standby laptop just to write the article. Sincerest apologies to all my readers for the same.
The week is again full of action on the primary markets front. We have as many as four issues opening during the week. The biggest of them is from HDB Financial Services Limited, which consists of a fresh issue of Rs 12,500 crores. The issue would open from Wednesday the 25th of June and close on Friday the 27th of June. Currently, HDFC Bank owns 94.32% of the company’s shares while 5.44% are owned by the public which has come through stock options. The remaining 0.24% are held by employee Trusts. The price band is Rs 700-740.
Interestingly, until a week ago, shares of HDB Financial were traded in the unlisted markets at a price of Rs 1,200 a share. The share issue band has come as a surprise to this segment of people and is a body blow to the unlisted markets, as people took it for granted that the traded price would be the issue price. Kudos to the company, its management and merchant bankers who are as many as twelve in number to stick to basics and fundamentals. The restated diluted EPS of the company for the year ended March 25 is Rs 27.3. Based on this EPS, the PE multiple is in the band of 25.6-27.1. The price to book for the company is at 3.72 which is marginally higher than the average of 3.6 times of the peer set but lower than the highest at 5.9 times.
The biggest risk factor that the company has is that going forward there could be a sharp dilution in the promoter’s shareholding if draft RBI circular issued in October 24 is implemented. The short of this circular states that the company cannot offer similar services and products as those offered by the bank. In this case as much as 92.54% of the revenue comes from services which are similar to what HDFC Bank offers. If the draft circular becomes law, the company going public would have to ensure that the shareholding of the promoter is reduced to less than 20% or as stipulated and the time frame would be 2 years, if it wants to continue the business of doing what it does.
Besides the above the performance of the bank has seen a decline with profits declining, quality of assets seeing stress and leading to some deterioration in key KPI’s. In the year of going public, the company has also reduced the provision coverage ratio. The AUM of the NBFC, going public is Rs 1.06 lakh crores. The companies who are peer set competitors include names like Bajaj Finance Limited, Sundaram Finance Limited, Shriram Finance Limited, Cholamandalam Investment and Finance Limited, Mahindra & Mahindra Financial Services Limited and L&T Finance Limited. A small point here would be in order to highlight the big risk mentioned, that none of the competitors have a bank which is part of the group or therefore the promoter of the NBFC.
There are three more companies IPOs opening during the week which include real estate player, Kalpataru Limited, Steel maker Sambhv Steels Limited and industrial gases manufacturer Ellenbarrie Industrial Gases Limited. More on these issues subsequently.
Coming to the action in the Middle East where USA has bombed Iran to support the lone ranger Israel. Iran has closed the Strait of Hormuz, which will make shipping routes longer and more expensive. Oil will become volatile and tend to move upwards as geo-political uncertainties increase. Not that it matters, Pakistan is making noise about the Indus water as it realizes how the shoe pinches. They are wanting to talk about water but not terrorism, as they deny they have any terrorists in their country. Things on the geo-political front will keep world markets on tenterhook and it may be a good idea to lie low for a couple of days. In any case after the rally on Friday, one would have waited for a pullback before taking fresh positions.
The key resistance for the market would be levels of 25,150-200 and this would have to be violated, broken upwards and sustained. On the support side levels of 24,500 would act as solid support. God forbid, this were to break we have support at 24,000 points.
For the next couple of days concentrate on four primary issuances in the markets staying away from secondary markets. A food for thought would be to analyze the unlisted price of NSE and the fact that many investors have got caught in some scams involving purchase of such shares at Rs 100 cheaper and now looking for the seller who has vanished with the money in his bank account. In light of what happened in the case of HDB, this would be time well spent.
Apologies once again for not providing complete data points this week.
Trade cautiously.
Arun Kejriwal (Market Veteran Investor & Opinion Maker)
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