Friday, December 21, 2007
Three out of every 10 stocks that were listed on Indian bourses this year returned more than 100% to investors. And three lost money for investors. Five returned more than the benchmark index of the Bombay Stock Exchange, which gained 36.9%, an indication, according to one analyst, of the hype-induced demand for these stocks.
Overall, 102 firms made their debut on the bourses this year between January and 20 December, raising Rs32,816.50 crore through initial public offerings, or IPOs.
“This year saw too much of foreign funds coming into India and artificial demand was also created in the market by the hype during the book-building process of new issues,” said Deven Choksey, managing director, KR Choksey Shares and Securities Ltd, a domestic brokerage.
Under the book-building process, investors bid for the price they are willing to pay for a stock, within a prescribed band. The offer price is fixed based on the response of investors. With the exception of a few issues, almost all IPOs were subscribed many times over, and the offer price fixed at the upper end of the band.
Foreign institutional investors (FIIs) have so far invested $16.4 billion in Indian equities this year, after investing $7.9 billion last year.
Mumbai-based Orbit Corp. Ltd tops the list of stocks that listed in 2007 in terms of performance, with returns of 645%. Shares of the construction firm, which listed at Rs90 in April, around a 18% discount to the issue price of Rs110, closed at Rs819.60 on Wednesday. Three stocks this year have returned more than 400% returns: Allied Computers International (Asia) Ltd (489.5%), Everonn Systems India Ltd (443.4%) and MIC Electronics Ltd (429.9%).
All returns were calculated on the basis of the offer price and the closing price of shares of the firms on Wednesday. For some stocks, this means the returns were calculated over a period of several months; for others, it means over a period of a few weeks. Two stocks returned between 300% and 400%, four between 200% and 300% and 20 between 100% and less than 200%.
An investment banker, who did not wish to be identified, said bankers managing IPOs were being extra cautious while pricing issues and discovering the real worth of the stocks in the secondary market after their listing. “While deciding on the offer price, lead managers are giving discounts to ensure the issues are sold. After they are listed, the stock finds its own price.”
The response to IPOs bears this out. While Orbit’s IPO was subscribed only 3.85 times, the Allied Computers issue was subscribed more than 30 times, and the Everonn Computers issue more than 131 times.
“At present, IPOs are a lottery and it’s all about getting allotment. These stocks are giving high returns since they were under-priced,” said Prithvi Haldea, chairman and managing director, Praxis Consulting & Information Services Pvt. Ltd, which puts out Prime Database, a primary market tracker. According to him, large institutional buying—between 50% and 60% of any public issue—also contributes to the rise in prices of freshly listed stocks. “In the past, the issues were sold mostly to retail investors. Institutional investors can easily exert pressure on the pricing,” Haldea said.
When a firm offers 10% of its equity to the public, 30% of the offer is reserved for retail investors, 10% for high net worth individuals and the rest for institutional investors. For lar-ger public floats, where a firm offers 25% of its equity, the po-rtion reserved for retail investors goes up to 35% and that reserved for high net worth individuals and institutions is 15% and 50%, respectively. In both cases, institutions are allowed to buy leftover shares in the other categories.
The Sensex returned around 46% last year, but corresponding returns from IPOs were muted. Only 23 stocks, out of the 95 that listed in 2006, returned more than the benchmark index. And only one in every nine stocks returned more than 100%. More than 45% of the stocks that listed in 2006 lost money for investors.
In contrast, fewer stocks have disappointed investors this year. Thirty-one of the 102 IPOs this year have given negative returns. The worst of the lot is House of Pearl Fashions Ltd. Priced at Rs550, it listed on bourses in February at a 10% discount and closed on Wednesday at Rs262.05, down more than 52% from its offer price. Broadcast Initiatives Ltd, that started trading in March, has also seen its value erode by more than 50% from its offer price.
While some investors buy IPOs with the sole intention of selling the stock on the day it lists, there are a few who invest in IPOs for the long term.
“Any IPO is great news for small investors like me but the problem is getting allotment of shares in a primary issue. Since there is always oversubscription, it is becoming increasingly difficult to get shares. As we get very few shares, the funds get locked till the listing date and I cannot invest in other stocks,” said Vishal Thakkar, an accountant in a multinational firm, who has been investing in IPOs for years now.
Analysts are bullish on the prospect for firms that plan to list in 2008, but with a few caveats. “The primary market will boom as long as there is a stable and buoyant secondary market,” Haldea said.
Krishna Kumar Karwa, managing director, Emkay Share & Stockbrokers Ltd, said newly listed firms would continue to give good returns as long as FIIs continued to invest in the country.
Qualified Institutional Buyers (QIBs) - 0.2124 times
Non Institutional Investors - 0.4790 times
Retail Individual Investors (RIIs) - 2.4435 times
OVERALL - 1.03 times
GREY MARKET PREMIUM @ 2-3
Short-selling will be back after a gap of six years, with the Securities and Exchange Board of India (Sebi) on Thursday allowing all classes of investors, including institutional ones, to sell stocks that they do not own at the time of trade.
Sebi also proposes to introduce the Securities Lending & Borrowing (SLB) scheme along with short-selling, which will allow traders to borrow stocks and honour their sales. All classes of investors will be allowed to participate in the stock lending and borrowing programme.
Short-selling, which is an essential feature of all developed markets, refers to the sale of securities that an investor does not own.
Investors sell short when they feel that share prices are overvalued and that the prices of shares they have sold will come down.
"Shorting will provide liquidity and help price corrections in over-valued stocks," said an analyst with a foreign brokerage. Restrictions on short-selling, according to its votaries, distort efficient share price discovery.
At present, there is no prohibition on short-selling by retail investors. Institutional investors — foreign institutional investors, mutual funds, banks and insurance companies — are, however, prohibited from short-selling, under different regulations, and are currently required to settle trades on a delivery basis in the cash markets.
The regulator did not specify any date for the implementation of short-sale, but has asked stock exchanges and depositories to put "fool-proof systems" in place for the new products.
Some of the features of the rules include a ban on naked short-selling. This means all short-sellers would be required to mandatorily honour their obligation of delivering the securities at the time of settlement. They can honour the trades by borrowing the securities through the proposed SLB scheme.
No institutional investors will be allowed to do day trading. This virtually prohibits squaring off of their transactions intra-day.
All shares that are in the futures and options (F&O) segment will be eligible for short-selling. There are currently 200-odd stocks available in F&O on the National Stock Exchange. Sebi said it will review the list of stocks that are eligible for short-selling from time to time.
A key feature of the SLB scheme is that the lending/borrowing will be for a tenure of seven days, to begin with. There will also be fixed standardised contracts for the securities under the SLB.
The settlement cycle on SLB will be on a T+1 basis. This means, investors are required to settle their transactions a day after their trades.
Securities lending and borrowing, which is considered a necessary ingredient for short selling, will be introduced simultaneously with short selling.
Sebi has been preparing the ground for short-selling and it had invited comments from market players on short sales in January 2006.
The regulator banned short sales in the Indian securities market in early 2001 following the Ketan Parekh scam, which saw a crash in stock prices under the weight of heavy short-selling by big operators. The new rules are expected to plug the loopholes in the earlier system.
In a circular, Sebi asked stock exchanges to establish systems to operationalise short-selling and SLB. The exchanges were also asked to ensure all appropriate trading and settlement practices as well as surveillance and risk containment measures, before their introduction.
On SLB, the capital markets regulator said, to begin with, the scheme will be operated through Clearing Corporation and stock exchange clearing houses that have nationwide terminals. At present, only BSE and NSE have nationwide terminals.
These clearing agents will be required to be registered as Approved Intermediaries (AI) under the Securities Lending Scheme.
Stock lending and borrowing will also be allowed only in F&O stocks.
Sebi said the borrowers and lenders should access the platform for lending/borrowing set up by the AIs through the clearing members (which include banks and custodians), who are authorised by the AIs for the process.
To follow the Know Your Client (KYC) norms, Sebi said AIs should allot a unique ID to each client, which would be mapped to the Permanent Account Number of the respective clients.
“AIs shall put in place appropriate systematic safeguards to ensure that a client is not able to obtain multiple client IDs,” the regulator said.
Crude oil prices went through some volatile trading range today. Prices dropped to almost $90/barrel at one end but also crossed $92/barrel at the other end. But going into close, prices closed marginally higher. Prices fell after Energy Department reported less than expected drop in natural gas inventory for the week ended 14 December.
For the day ending Thursday, 20 December, 2007, crude-oil futures for light sweet crude for February delivery closed at $91.04/barrel (lower by $0.20/barrel or 0.2%) on the New York Mercantile Exchange. Futures rose as high as $92.25 earlier in the day and fell as low as $90.57 in trading today. Prices are 43% higher than the year before.
Yesterday, the Energy Department, reported that U.S. crude inventories fell by 7.6 million barrels to 296.9 million barrels in the week ending 14 December, the lowest since February 2005. That was the fifth straight week of drop. U.S. refineries operated at 87.8% of their operable capacity last week, down 1% from the previous week's 88.8%.
As per EIA, at 296.9 million barrels, U.S. crude inventories were in the lower half of the average range for this time of year and at lowest level since February, 2005. U.S. crude-oil imports averaged 9.1 million barrels per day last week, down 952,000 barrels per day from the previous week.
Brent crude oil for February settlement fell $0.60 (0.7%) to $90.88 on the London-based ICE Futures Europe exchange.
Natural gas gives up earlier gains as inventory drops less than expected
Natural gas prices erased earlier gains and closed lower for the day. The EIA reported today that U.S. natural gas inventories dropped 121 billion cubic feet to 3,173 billion cubic feet in the week ending 14 December, less than expected figure of 129 billion cubic feet. Natural-gas futures for January delivery fell 4.2 cents to $7.137 per million British thermal units.
Against this backdrop, January reformulated gasoline gained 0.43 cents to $2.3320 a gallon and January heating oil fell 0.84 cent to $2.5895 a gallon.
As per EIA, global oil markets will likely remain tight through 2008 and monthly average oil prices are expected to near $85 per barrel over the next year. The IEA, an adviser to 27 nations, said global demand in 2008 will rise 2.5% to 87.8 million barrels a day.
At the MCX, crude oil for January delivery closed at Rs 3,619/barrel, higher by Rs 22 (0.61%) against previous day’s close. Natural gas for December delivery closed at Rs 284.1/mmtbu, higher by 4.6/mmtbu (1.6%).
Members of the OPEC left production targets unchanged at the 5 December meeting in Abu Dhabi. The group, which produces 40% of the world's oil, will review output at a 1 February, 2008 meeting in Vienna.
Precious metals ended mixed once again after gold prices fell and silver gained today, Thursday, 20 December, 2007. The dollar strengthened today against most of its rival currencies barring yen. Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.
Comex Gold for February delivery fell $2.2 (0.3%) to close at $803.2 an ounce on the New York Mercantile Exchange today. Earlier the price fell to almost $802.2/ounce. Last week, prices rose by almost 0.3% ($2.2/ounce). On, 7 November, prices had touched $848/ounce. It was the highest price after a record $873 on 21 January, 1980.
Comex Silver futures for March delivery rose 11.8 cents (0.8%) to $14.34 an ounce. Silver prices climbed up as copper rallied by more than 2% and 2.5% today and yesterday respectively. Prices touched 26 year high on 7 November, after reaching $16.275. The metal has climbed 11% this year.
Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. Rising crude increases inflationary pressures and vice versa. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.
In the currency market today, the dollar drifted lower against the yen but continued to gain on most of its major rivals. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, rose 0.2% to 77.715.
In the energy market, oil prices ended marginally lower today after going through some volatile session. Price closed lower by 20 cents at $91.04/barrel.
Gold had climbed 25% this year till date as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Dollar is still 8% down against the euro this year.
In 2006, silver had jumped 46% while gold gained 23%.
Last week on 11 December, Federal Reserve lowered the federal funds rate by a quarter-point to 4.25%. The Fed also lowered its discount rate, the interest it charges on direct loans it makes to banks, by a quarter-point to 4.75%.
Dollar had been witnessing a free fall since Federal Reserve cut interest rates in September. Before 11 December, Federal Reserve had cut the fed funds rate by a quarter-point to 4.50% on 31 October, 2007. Prior to that, Federal Reserve had cut interest rates by half percentage point on 19 September, 2007.
At the MCX, gold prices for February delivery closed lower by Rs 25 (0.24%) at Rs 10,232 per 10 grams. Prices rose to a high of Rs 10,268 per 10 grams and fell to a low of Rs 10,175 per 10 grams during the day’s trading.
At the MCX, silver prices for March delivery closed Rs 154 (0.82%) higher at Rs 18,913/Kg. Prices opened at Rs 18,773/kg and went to a high of Rs 19,005/Kg during the day’s trading.
It was a clear day for technology stocks at US Market today, Thursday, 20 December, 2007. Above-expected result from Oracle after yesterday’s close helped Nasdaq witness its best day in the past fortnight. The other two indices – Dow and S&P 500 too ended the day with modest gains, but Nasdaq rallied with substantial gains.
First ever quarterly loss from Bear Sterns in its eighty-four year history once again brought back the credit market jitters in the financial market. All ten sectors ended the day higher, except for the financials. Market expecting good earnings report from another tech biggie, Research in Motion (RIMM) after today’s close, helped offset the nervousness in the financial market.
The Dow Jones industrial Average ended the day with a gain of 38.87 points at 13,245.64. The Nasdaq Composite Index, finished higher by 39.87 points at 2,640.86. S&P 500 finished higher by 7.12 points at 1,460.12. While IBM and Microsoft provided good support to Dow today, Citigroup, AIG, JP Morgan continued to be Dow laggards.
Oracle shares jumped 6.4% today after the software maker posted a 35% rise in fiscal second-quarter profit, topping Wall Street's expectations. This gave overall tech sector a good boost today.
On the other hand, Bear Sterns reported a huge loss, which was a much larger loss than what analysts expected. Nevertheless, market ignored the report and the stock ended higher for the day.
Also, weighing on the financial market was the news that bond insurer, MBIA has $8.6 billion in collateralized debt obligations. The stock slumped almost 25%. Earlier this week, Standard & Poor's and Moody's affirmed their highest credit rating on MBI, but cut their outlook to negative.
Market ignores economic data
Among economic news that hit the wires today, third quarter real GDP was unchanged at a 4.9% annual growth rate. Core PCE rose 2% quarter over quarter and the GDP Price Index rose 1%. The report was just the final revision, so it did not have much of an impact on the market.
Also, the weekly initial jobless claims for the week ended 15 December rose to 346,000 from 335,000 the week before.
The other technology stocks that supported the market today were Apple, Microsoft and RIMM. After close, RIMM came out with earnings report that beat expectations.
Indian ADRs ended mixed today. Tata Motors and Infosys Technologies were the two topmost gainers, gaining more than 5% each. VSNL, yesterday which shot up by more than 20%, was today’s top loser shedding more than 5%.
Crude witnesses volatile trading
Crude oil prices went through some volatile trading range today. Prices dropped to almost $90/barrel at one end but also crossed $92/barrel at the other end. But going into close, prices closed marginally higher. Prices fell after Energy Department reported less than expected drop in natural gas inventory for the week ended 14 December. Crude-oil futures for light sweet crude for February delivery closed at $91.04/barrel (lower by $0.20/barrel or 0.2%) on the New York Mercantile Exchange.
Trading volumes showed 1.3 billion shares exchanging hands on the New York Stock Exchange and 1.9 billion trading on the Nasdaq. Gaining issues topped decliners by 17 to 14 on the NYSE and by 18 to 11 on Nasdaq.
Tomorrow, investors will focus on economic reports to set the tone of trading. Personal Income and Outlays for November are due tomorrow tomorrow morning which includes Core Personal Consumption Expenditures (PCE), Fed’s favorite inflationary gauge. The Revised Consumer Sentiment Survey, published by the University of Michigan, is also due tomorrow.