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SFBs get a boost as they can absorb the holding company

small finance bank
12/07/2021

In the last few days, small finance banks and their parent companies have shown a sharp rally. What exactly has changed? Both Equitas Small Finance Bank (SFB) and Ujjivan Small Finance Bank (SFB) propose to apply for amalgamation of their parent with the SFB. While Ujjivan Financial is the holding company of Ujjivan SFB; Equitas Holdings is the holding company for Equitas SFB. This was after the RBI permitted SFBs to merge their holding companies into themselves. How this announcement relevant.

It assumes significance as both Equitas SFB and Ujjivan SFB are about to complete five years of operations. Under the RBI regulations, on completion of 5 years the holding company must dilute its stake in the SFB to below 40%. Both the holding companies; Ujjivan and Equitas, hold nearly 82% in the SFB arms. Reducing this stake to below 40% would entail a massive surge in free float depressing prices. The new RBI rule will allow the SFB holding companies to avoid dilution by merging the holding company into the SFB. This will ensure that the valuation of the group improves.

In the last few months, this mandatory holding company dilution was the reason for stock prices being tepid. With RBI allowing SFB holding companies to amalgamate with the SFB, this dilution issue is automatically addressed. But there is a bigger takeaway. Most holding companies in India are subjected to a holding company discount and this was depressing valuations. With the new rule, that discount should go away, allowing more value based pricing for SFBs. That is what is getting markets excited about Ujjivan and Equitas.
 

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Inflation poses a challenge at above 6% in June

Inflation
13/07/2021

The good news was that inflation at 6.26% for Jun-21 was way below the consensus estimate of 6.9%. The bad news was that inflation was just marginally below the May-21 inflation level of 6.3% and well above the RBI tolerance level of 6%. Remember, the 6% is the outer tolerance limit of RBI with respect to inflation and its median inflation target for the Indian economy is 4%. So, the current inflation is still way higher.

Let us turn to the components of inflation. Core inflation (which excludes food and fuel) was slightly down from 6.55% in May to 6.16% in June. However, food inflation spiked from 5.01% to 5.15% in June on the back of higher oil, fat and egg inflation. But the bigger concern for the RBI would be the sharp spike in fuel inflation and transport inflation. Fuel inflation spiked from 11.6% in May-21 to 12.68% in Jun-21 while transport inflation also came in sharply higher at 11.56%. Food inflation was much sharper in rural India.

The steep levels of inflation can be attributed to higher crude prices. Typically, a $10 per barrel increase in crude oil prices lead to a 0.5% rise in inflation in India. Additionally, higher fuel prices and higher transport inflation have strong externalities in the sense that they seep into almost all goods and services. For the RBI, the bigger challenge is the pressure on real rates of interest and the pressure to hike interest rates to compensate investors. We will await the RBI monetary policy in August for greater clarity.
 

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What is so hot about fertilizer stocks?

Fertilizer sector - stocks to watch
13/07/2021

In the din and euphoria over steel and internet stocks, investors appear to have forgotten a silent multi-bagger in the last 8-9 months. Of course, we are referring to fertilizers. The robust Kharif output last year gave an impetus to fertilizer stocks. Since Sep-20 most fertilizer stocks have at least doubled. Then there are the likes of Chambal Fertilizers that is up 3 times and Deepak Fertilizers up nearly 4 times in this period. What exactly has been the trigger for this fertilizer stock rally?

During the last few months, the government has made a series of announcements, hiking the subsidy on fertilizers to reduce the burden on farmers. Yes, fertilizer input prices have gone up and most fertilizer companies have had to raise prices. In June, the government hiked subsidy on key fertilizers by 140%. For example, the government will now offer a subsidy of Rs.1,200 per bag of NPK (Nitrogen, Phosphatic, Potassic) fertilizers as compared to Rs.500 offered so far. When you combine with the robust MSP offered by the government to farmers for Kharif procurement, it puts fertilizer stocks in a sweet spot.

But, what is more interesting is that valuations of fertilizer stocks are still attractive. For example, Chambal Fertilizers is available at 9.2X P/E while Deepak Fertilizers is available at about 20X P/E. Then there are the PSU fertilizer plays like NFL and GSFC, that are still available at just about 10X P/E and GNFC at 8X P/E. These valuations are after the sharp rally. With the government willing to stretch its fertilizer subsidy bill higher, it surely spells good times for farmers and for fertilizer stocks.
 

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Happy days for realty sector as Realty Index scales 10-year highs

BSE Realty Index
13/07/2021

An unlikely sectoral index, BSE Realty Index, hit 10-year highs recently. Even as experts have been talking about weak offtake in residential properties, the undertone appears to be changing gradually. A host of stocks like Godrej Properties, IB Real Estate, Macrotech Developers and Mahindra Lifespaces scaled new highs in the stock market. Smaller names like Prestige Estates, Sobha and Brigade have also showed traction. What is driving these realty stocks?

Two factors contributed to the surge in residential real estate demand. Home loan rates are at an all-time low and most states have given concessions or waive on registration charges. This spurred a spate of investments in residential properties. In FY21, Godrej Properties sold an average of 20 homes per day, even as it beat Macrotech to become India’s largest real estate company. In the Jun-21 quarter, real estate developers have reported a sharp fall in residential inventory and that is changing the outlook for realty stocks.

Also Read: Godrej Properties is India’s largest realty player

The real estate story in India is not just about the crisis of the last few years, but the recovery that is expected in the next few years. Consider some numbers. Macrotech is up over 80% since its listing in April this year. Godrej Properties has doubled since September while Mahindra Lifespaces has tripled in the last 1 year. That is the story with most real estate companies. The moral of the story is that after a very long time, the stock market appears willing to bet on a full-fledged recovery in residential real estate demand. That is the difference!
 

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Digital dominates as MobiKwik all set for IPO

 MobiKwik IPO
13/07/2021

It looks like the new age of digital IPOs. After Zomato announced the opening of its IPO on 14 July, many more digital players will use this digital trend to make a mark. Of course, the mega Paytm IPO is already in the works and another mega digital issue of Nykaa is also expected during this fiscal. But, next on the digital line for IPOs appears to be MobiKwik, which just filed the Draft Red Herring Prospectus (DRHP) with SEBI for its proposed IPO.

According to the DRHP, MobiKwik will raise fresh funds of Rs.1,500 crore and will also do an offer for sale (OFS) for Rs.400 crore, taking total IPO size to Rs.1,900 crore. Some of the early investors taking partial exit in the OFS will include American Express, Bajaj Finance, Cisco, Sequoia Capital and Treeline Asia. Meanwhile, the company is also planning a pre-IPO placement, in which case the IPO size will  be reduced proportionately. 

In India, MobiKwik offers two principal services viz. MobiKwik Wallet, which is a simplified payment system, and BNPL facility, which is a buy now pay later scheme for users. The focus of MobiKwik has been to address the unmet credit demands in online transactions by combining the wallet and BNPL. As of now, ecommerce is a largely under-represented segment in the Indian stock markets. Hopefully that should change with Zomato, Paytm and MobiKwik listing on the bourses.
 

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Upcoming IPOs in July 2021 – Get ready for the IPO surge

Upcoming IPOs in July 2021
14/07/2021

The IPO business started a tad late in July. We are well into the third week of July and only 2 IPOs have been completed. The Rs.963 crore IPO of GR Infraprojects and the Rs.1,547 crore IPO of Clean Science and Technologies; both got subscribed over 90 times.

But the Zomato IPO opening on 14 July could set the trend for a string of IPOs in July. Here is a look at the big IPOs expected to open for subscription in the July 2021.

Upcoming IPOs in July 2021 – Some real big IPOs in the offering

IPO Issuer

Sector

Fresh Issue

Offer for Sale

Issue Size

Tatva Chintan Pharma IPO

Specialty Chemicals

Rs.225 crore

Rs.275 crore

Rs.500 crore

Seven Islands Shipping IPO

Logistics

Rs.400 crore

Rs.200 crore

Rs.600 crore

Ami Organics IPO

Chemicals

Rs.300crore

Rs.350 crore

Rs.650 crore

Arohan Financial IPO

Microfinance

Rs.850 crore

Rs.950 crore

Rs.1,800 crore

Shriram Properties IPO

Real Estate

Rs.250 crore

Rs.550 crore

Rs.800 crore

Utkarsh SFB IPO

Small Finance

Rs.750 crore

Rs.600 crore

Rs.1,350 crore

Glenmark Life Science IPO

Pharmaceuticals

Rs.1,160 crore

Rs.540 crore

Rs.1,700 crore

Vijaya Diagnostics IPO

Healthcare

-

Rs.2,000 crore

Rs.2,000 crore

Nuvoco Vistas IPO

Cement

Rs.1,500 crore

Rs.3,500 crore

Rs.5,000 crore

Aadhar Housing IPO

Home Finance

Rs1,500 crore

Rs.5,800 crore

Rs.7,300 crore

Car Trade IPO

Ecommerce

-

Rs.2,000 crore

Rs.2,000 crore

Penna Cement IPO

Cement

Rs.1,300 crore

Rs.250 crore

Rs.1,550 crore

Go Air IPO

Aviation

Rs.3,600 crore

 

Rs.3,600 crore

Zomato IPO

Ecommerce

Rs.9,000 crore

Rs.375 crore

Rs.9,375 crore

Rolex Ring

Auto Ancillary

Rs.70 crore

 

 

Data Source: SEBI Filings

Here is a quick look at the big IPOs in July 2021.

  1. Vijaya Diagnostics will raise Rs.2,000 crore via offer for sale. Vijaya is backed to the extent of 40% by Kedaara Capital. Vijaya is looking to capitalize on the tremendous response to the KIMS IPO and the positive sentiments surrounding healthcare.
     

  2. Glenmark Life Sciences is the API arm of Glenmark hived off via an IPO. The company has aggressive expansion plans and it will look to capitalize on the huge global demand for active pharma ingredients (APIs) in the post pandemic scenario.
     

  3. Nuvoco Vistas, the cement arm of Nirma, will raise Rs.5,000 crore. Nuvoco combined the cement interests of Nirma and added Lafarge India operations plus Emami Cements to it. Cement IPOs are in the limelight for robust demand and solid pricing power.
     

  4. Aadhar Housing Finance will use the Rs.7,300 crore IPO to give an exit to Blackstone, which owns over 98% in Aadhar Housing. The company is focused on low income home loan borrowers, which is one of the fastest growing segments in home loan business.
     

  5. Car Trade, an online digital trading platform for cars, will also come out with an IPO worth Rs.2,000 crore; structured as an offer for sale. Digital stocks are grossly under-represented in Indian market. The scarcity value will be the big story for Car Trade.
     

  6. If all goes well, Go Air plans to raise Rs.3,600 crore via the IPO route to bankroll its recovery and expansion plans. Aviation stocks have had a rough 18 months with deep losses. However, the scarcity value will still work in favour of Go Air.

The first of the mega issues; the Rs.9,375 crore IPO of Zomato open 14 July and closes 16 July. Obviously, other IPOs are waiting for the Zomato IPO to test waters. If the response is rock solid, expect a lot more IPOs to get front-ended to July 2021. Get ready for the surge!

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