BUBBLE TO GO BUST?

By Ruma Dubey

Take at look at these three news which appeared on Bloomberg, all on the same page:

1. Singapore government’s wealth fund Temasek will make threefold gains as it sells a third of its nearly 20 percent stake in Godrej Agrovet Ltd., India’s largest animal feed maker, in an initial public offering.
2. Prataap Snacks Ltd.’s Rs 482-crore initial public offering was subscribed 4.14 times on the last day of bidding as of 1 p.m. The portion set aside for qualified institutional buyers (QIBs) received the highest demand at 6.35 times the shares on offer; retail investors was just 0.21 times.
3. Shares of Avenue Supermarket rose as much as 18.3 percent, the most since its March 21 listing, to a record after Goldman Sachs initiated coverage with a ‘Buy’ on the stock. The report says, “the retailer’s valuation at 65 times the expected EPS for FY19 appears high. Yet, it does not factor in that the D-Mart parent has a “long runway for growth on the back of its robust business model”.

All these news in itself have a story to tell us today. The first – this is the trend today where almost every IPO first gets in anchor investors and then make an offer for sale.  Thus the anchor investors make a killing, more than we the retail investor.

The second – this IPO does not deserve this kind of valuation , based on its fundamentals and earnings. In fact in our New Issue Analysis, we had said, “On inconsistent and wafer-thin margins coupled with aggressive issue pricing, the IPO can be given a miss.”  Yet, unmindful of its pricing or wafer thin margins, the issue is already subscribed over 4 times, mainly on the back of QIBs.

And then the third – fundamentals, the GST all work in favor of Dmart yet, this kind of valuation today defies all logic. Goldman itself admits – 65 times the EPS of FY19!! How is that logical in any way?

Thus we today have a booming IPO market; no doubts about that but all getting sold at such high valuations, much ahead of what they deserve makes one wonder what is this market all about. Are we actually seeing a bubble here, led by the anchor investors first and then the QIBs?

If you look closely enough, majority of the IPOs that we see today are offers for sale by promoters and anchor or private equity investors. They are one’s who are making a killing. Take the case of Prataap Snacks itself – Sequoia bought its shares between 2011 and 2014 at an average price of little over Rs.200/share but today, it is selling 13.6% at a price of Rs.938/share in the IPO. So who is the biggest gainer here?

There is little doubt that what we are seeing in some of these mid and small cap stocks is a bubble where the funds and the market is discounting future earnings at very high rates and expects these gains to remain like this forever. Isn’t this model of investing itself flawed? Once the anchor investor and QIBs sell, what happens to the bubble? Obviously, it splatters onto the ground.

So boom alright in the primary market but be fully mindful of a bust too!!