Small Is Beautiful For Ipos, Dmart F & ‘No’

As with the economy, it appears to be a K-shaped trend in the Initial Public Offerings (IPO) market as of late. But with a difference. Large companies are doing well and smaller ones are struggling economically. In the primary market, the reverse seems to be true based on the events of the past two weeks.

First, Paytm’s IPO received a lukewarm response and stocks listed at a steep discount. Then, last week, the IPO of Star Health and Allied Insurance Company, which counts Rakesh Jhunjhunwala among its investors, was pretty much resolved. Ask the market experts and they will tell you that both shows were very expensive. They might be right, but so are many of the smaller shows that have recently hit the market. To add insult to injury for Paytm and Star Health, the IPOs of most of the little-known companies are not only heavily underwritten, but many of them also generated massive gains on the day of the launch. quoting.

So are these really big investors sending the signal that they won’t tolerate overpriced issues?

The gossip on the street is that it is a combination of expensive valuations, a change in sentiment and, last but not least, that the NBFCs are wary of lending funds to wealthy investors for introductions in. large purse. One thing common to Paytm and Star’s IPOs was the disappointing response from high net worth investors – HNIs or high net worth individuals – who bid for the non-institutional portion of the book.

More than fund managers, NBFCs seem to become worried about valuations when the size of the IPO is large. The larger the issue size, the higher the number of shares granted is likely to be if the overall response is low. It’s not something the NBFCs want. The higher the award, the more risky NBFC funds are on the day of listing. They are more than happy to lend for smaller IPOs, where demand is massive and the allocated shares represent a small percentage of the quantum supply. In such a scenario, NBFCs recoup almost all of their fees even before the problem is listed.

Another reason small IPOs are successful, according to brokers, is that many promoters make special deals with traders to ensure their stocks are on the line for a period of time after listing.

No F&O for DMart

Last week, my colleague Anuj Singhal raised the question of why DMart was not included in the list of securities eligible for trading in futures and options on the NSE. This despite the stock fulfilling the four criteria to reach the sacred group. This also raises another question: Is adding to the F&O list an automatic process or does the exchange need the company’s permission before including it?

So far in 2021, the NSE has included 60 stocks in the F&O list. Not unusual during a bull market when prices are rising almost one way. A similar trend was also seen during the bull market of 2007. Many promoters aspire to have their shares in the F&O group, especially those known to take care of their own shares.

But the founder of DMart, Radhakishan Damani, would not complain that his action is not successful. It’s been in the market long enough to know that an M&O presence is a double-edged sword. In a bull market, this amplifies the rise in stock prices as traders load futures contracts for a small initial margin. But in a falling market, it becomes a powerful tool in the hands of bears looking to hammer stocks.

Ideally, spot market prices should determine the trend of futures prices. But it is perfectly possible to manipulate the spot market price by influencing the futures prices on either side. If some traders get together and hammer the futures in a coordinated fashion, it could push the futures price below that of the spot market price. This could trigger reverse arbitrage in which some investors could sell DMart shares and buy futures contracts for quick arbitrage. Selling in the spot market could in turn push the share price down, prompting further sales from nervous investors.

There is no doubt about the strength of DMart’s business model and Damani’s ability to hold its own in a fiercely competitive arena dominated by rivals with generous pockets. But valuation is a whole different matter, especially now that market sentiment has deteriorated. After leading legions of bears plundering overvalued stocks during the 2008 stock market crash, Damani would know only too well what it feels like to be on the other side of the door when bears knock. the door.

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(Edited by : Vijay Anand)

First publication: STI

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