The ‘freak show’ on the NSE and why it is happening
On Tuesday, the Indian stock markets were witness to a ‘freak show’ that saw futures contracts of several index heavyweights on the National Stock Exchange (NSE) open with a gap up of as much as 10%.
As stock markets opened for trade, September futures of several marquee counters including Reliance Industries Ltd (RIL), HDFC Bank, HDFC Ltd and Bharti Airtel were up sharply.
While RIL futures opened with a 9% spike over the previous close, futures of Bharti Airtel and the HDFC twins were up by nearly 10% each. This, even as these counters were trading flat on the spot market.
So, effectively, even while there was no significant movement in the underlying stocks, the derivatives market opened with a significant gap up.
Has such freak trade happened before?
Yes, this is not the first time such a ‘freak show’ has happened on the India share bazaar. Exactly a week before the latest anomalous event, movement in the Bank Nifty options segment had given a nervous time to traders as the index surged by a staggering 2,000%.
The premium of weekly Bank Nifty 36,000-strike put option, due for expiry on September 9, surged to a high of Rs 750 from Rs 35.25. It finally closed at Rs 53.65 against the previous close of Rs 62.15. The underlying Bank Nifty index opened at 36,559 points and hit a high of 36,686 before closing with a loss of over 100 points.
In fact, these events have been happening ever since the NSE scrapped the so-called trade execution range (TER) in August. The TER had been put in place to avoid erroneous trades, colloquially dubbed ‘fat finger trades’.
What is the trade execution range? What are fat finger trades?
Trade execution range (TER) basically refers to a quantity freeze rule that regulates the order flow to within a range, so as to avoid erroneous trades caused by mistyping.
A ‘fat finger trade’ is one where the number of units of say an index or stock futures to be bought or sold are entered erroneously. This triggers a massive upsurge in demand or supply, leading to a significant gap up or gap down opening.
In August, the exchange had defined these freeze quantities for Nifty, Bank Nifty, Finnifty at 2800, 1200, and 2800, respectively. Above these limits, orders would be automatically cancelled.
Moreover, the NSE had also set price ranges. If the price crossed the lower or upper limits, the exchange would halt any trading till the price came down.
So, why was this system abolished? Why is that a problem now?
The new system became problematic and caused price discovery distortions when prices actually swung sharply, causing a mismatch. So, the NSE removed it.
But the removal of the system has now become problematic as it has led to these freak trades.
A Moneycontrol report says this is also thanks to people trying to game the system, in a bid to avoid taxes.
The report points out that while the cash segments have various price filters, the F&O segment does not have such filters. “However, there is a dynamic price band of 10% on either side. When the prices of the futures contract hit the 10% limit, there is a cooling period of 15 minutes before the limits are revised for the day,” it notes.
According to the report, high-net-worth individuals looking to evade tax or launder undisclosed income often do so through fictitious trades in the F&O segment. “There are brokers who offer such services for a fee,” it added.
Since law enforcement authorities like the income tax department and the market regulator, the Securities and Exchange Board of India (SEBI), have tried to curb this activity in the F&O segment, the action seems to have shifted to index heavyweight stocks.
These auto stocks can benefit as govt approves PLI scheme
The Indian government has approved a production-linked incentive (PLI) scheme for the automobile sector to help companies ramp up local manufacturing of cars, bikes and electric vehicles.
The government has fixed an outlay of almost Rs 26,000 crore for the scheme, which will be effective from 2022-23 for five years. The base year for eligibility criteria would be 2019-20.
To benefit from the scheme, automakers should have annual revenue of at least Rs 10,000 crore and Rs 3,000 crore investment in fixed assets. Auto-parts makers should have clocked revenue of at least Rs 500 crore and Rs 150 crore investment in fixed assets.
The government estimates that the PLI Scheme will lead to fresh investment of Rs 42,500 crore and incremental production of Rs 2.3 lakh crore over a period of five years. This will help create 7.5 lakh jobs.
Shares of auto and auto component companies climbed on Thursday after Wednesday’s decision. Bosch was the biggest gainer, rising 5% on the BSE. Two-wheeler makers Hero MotoCorp and Bajaj Auto as well as component maker Tube Investments of India rose almost 2%, before paring the gains. The benchmark BSE Sensex was up 0.4%.
However, top automakers Maruti Suzuki, Tata Motors and Mahindra & Mahindra were trading lower, likely because the scheme for vehicle manufacturers is only applicable on battery electric vehicles and hydrogen fuel cell vehicles.
What analysts say about PLI scheme
Motilal Oswal Financial Services says that the incentives offered under the scheme are attractive and that the eligibility criteria on both revenue and expected investment are reasonable.
It noted that the incentives are lower than the original plan of Rs 57,000 crore but said the step will help improve competitiveness in the segment.
Motilal Oswal picks two-wheeler makers Bajaj Auto and TVS Motor as well as car and truck maker Tata Motors among the likely beneficiaries.
Antique Broking says the scheme will promote cleaner technologies as it gives sops to companies that make EVs and fuel cell vehicles.
On the flip side, this means traditional automakers will have to transition quicker from internal combustion engine-powered vehicles to EVs. This will require heavy investments, and is a negative for such companies. The brokerage houses feels Tata Motors and auto component firms like Bosch and Sona Comstar will benefit.
Kotak Securities and Swastika Investment both think Bosch and other auto-parts companies like Minda Industries, Motherson Sumi, Jamna Auto, Endurance Tech, Varroc Engineering and Sona Comstar will benefit from the scheme.
ICICI Securities thinks that Mahindra & Mahindra—India’s biggest maker of sport-utility vehicles—can benefit as well.
ITC shares surge, finally! Is it breaking out?
Cigarette maker ITC Ltd, which has diversified across fast-moving consumer goods (FMCG), hospitality, paper and other areas, has been one of the laggards in the stock market rally that has seen benchmark indices hit new highs.
Despite being among the stock picks of scores of analysts, ITC had underperformed the top indices as well as its peer set. However, the counter surprised the markets with a sharp 8% rally on Thursday to touch Rs 232 a share. ITC’s stock price is now near its 52-week high of Rs 239, which it reached in February.
But the stock is still nearly 30% below its peak in 2017 when it had reached Rs 339 apiece. ITC’s share price has been sliding for the last two years in particular, much before the onset of the coronavirus pandemic that also sunk it to half its previous peak.
While most large-cap stocks in the Nifty 50 had bounced back from the lows of early 2020, when the lockdown in the country hit most businesses, ITC just about recovered. The Nifty 50 has more than doubled since March 2020 while ITC, even after today’s rally, is up just about 50% in the same period.
ITC’s counter saw a sharp spike in trading activity, with more than nine-fold jump in trading volume on the BSE and a similar spike on the NSE. A combined 136 million equity shares changed hands on the NSE and BSE till 1:49 pm. The stock had been recording a daily average of 10-20 million shares in the last few days.
Trades with heavy volumes indicate big investors are piling up on the stock, which is one of the few large caps that have been out of favour for long.
What was wrong with the ITC stock?
The country’s biggest cigarette maker and the second-largest FMCG company had been facing the ire of some institutional funds that base their investment decisions given their environmental, social and governance (ESG) norms. While ITC has a large business that is ESG-compliant, these funds tend to discount the company given its cigarettes business that still contributes a bulk of its profits.
The negative impact of cigarette consumption on people’s health has been a long-term concern and as more funds adopt ESG investment norms, ITC was losing fans.
At the same time, many fund managers perceived that the company has been slow in pushing up its FMCG business which could have given it a much higher valuation like its peers. The company’s hospitality business was also affected by the pandemic like the rest of the hotels and tourism industry.
Some have been waiting for the company to demerge its business units to spur the FMCG unit as a separate company.
Is it catching up? What do experts say?
“The stock was lagging behind in terms of performance. While several other stocks have now turned expensive, this seems to be one of cheaper stock available. The stock is now doing some catch-up, and single handedly has supported the Nifty today, contributing 30-odd points,” according to A Prabhakar, head of Research, IDBI Capital.
Deepak Jasani, head of research at HDFC Securities, believes the breakout was likely due to the expectation of restructuring of the company that could be announced next month. This is with respect to a possible demerger of one or more businesses to unlock value.
Some believe the firm is now going to enjoy better earnings profile. “We also believe elevated commodity prices would cool off in the next two to three quarters with considerable margin improvement in the FMCG business set to continue. However, investor perception of cigarettes business and its long-term prospects has been one of the biggest drags for the stock price performance in the last five years,” according to ICICI Securities.
According to B&K Securities, all of ITC’s businesses were showing favourable tailwinds in their recovery from the pandemic and a rerating is “around the corner”.
“The stock trades at an FY22E estimated dividend yield of 5.5%, higher than most fixed-income instruments today, so downside below Rs 200 is ruled out,” according to a note by the brokerage.
Chirag Shah and Nitin Gupta, analysts at CLSA, expect the company's FMCG business is on a path for a profitable scale-up and could deliver more than 26% CAGR in EBITDA over the next three years given industry tailwinds, margin levers and improving asset utilisation.
Sansera Engineering IPO: Tepid response from retail investors but QIBs save the day
Sansera Engineering Ltd, which makes components for automotive and aerospace companies, received a lukewarm response from retail investors to its initial public offering even though the overall issue sailed through easily.
The company’s IPO was covered 11.5 times at the end of the third and final day on Thursday, thanks mainly to strong interest from qualified institutional buyers (QIBs).
The IPO of 1.2 crore shares, excluding anchor investors’ portion, received bids for 13.88 crore shares, stock-exchange data showed.
The QIB portion was subscribed 26.5 times, as they bid for more than 9 crore shares. Non-institutional investors, which include corporate houses and high-net-worth individuals, bid for 11.4 times the shares reserved for them.
The quota reserved for retail investors was covered only about 3.15 times.
The retail investors’ response to Sansera’s IPO is weaker than many other issues this year, as a stock market euphoria has prompted thousands of people to invest in companies going public. The IPO of Krsnaa Diagnostics, for instance, had seen strong from retail investors with their quota getting covered 42 times.
But retail investors have been choosier recently. For instance, the retail book of Vijaya Diagnostic Centre Ltd was oversubscribed just 1.2 times and that of online auto marketplace CarTrade was subscribed 2.75 times.
Sansera’s IPO involved a sale of 1.7 crore shares by its promoters and Rohatyn, a private equity firm. This included about 51 lakh shares that anchor investors bought a day before the IPO opened for public bidding.
The overall IPO size is Rs 1,280 crore at the upper end of the Rs 734-744 price band. The company will command a market valuation of Rs 3,800 crore at the upper end of the range.
Sansera began operations almost 40 years ago. It makes components for automotive and aerospace clients that include Bajaj Auto, Yamaha, Honda Motorcycle and Maruti Suzuki.
If you are looking to invest in Info Edge, know about the company
Founded by Sanjeev Bikhchandani in 1997, Info Edge (India) Ltd., is an internet company that has an online job portal (Naukri.com), a matrimony website (Jeevansathi.com), a real-estate classifieds platform (99 Acres.com) and an educational website (Shiksha.com). In addition to this, it also has a stake in 23 companies, including Zomato and PolicyBazaar, both of which are ‘unicorns’ in the start-up world (worth more than $1 billion).
Naukri.com is the biggest part of the company. Over the last one year, it has seen a massive increase in billables. This increase is largely due to the higher demand for jobs in the IT Sector. The IT sector accounts for more than half of the revenue from hires. In the last quarter, Naukri saw an increase of new unique customers on the website as well. Management expects this to increase across all sectors going forward with the economy improving. In terms of market share, Naukri.com already has the highest number of visitors & time spent on the website as compared to the rest of the industry.
99 acres is the second largest part of the company. The first two months of FY21 were adversely affected for real estate due to the second-wave of COVID-19. However, there was strong recovery in the third month. Management thinks that the recovery has come about strongly due to the affordability of real estate, and expects this to increase going forward. The market has seen an increase in customer spending on real estate digitally.
Info Edge has been spending on advertisement and marketing for Jeevansathi.com and Shiksha consistently so as to gain a competitive edge. They continue to do so and increase their market share.
The company also has a stake in Zomato, which accounts for 50% of the online food ordering market and PolicyBazaar. PolicyBazaar has 90% of market share and offers hundreds of insurances from many insurers on its platform. PolicyBazaar plans to go public in the near future which would increase its valuation as well.
All in all, the company has a strong play on the internet across different sectors. It is an innovative company that aims to make things easier for their consumers digitally. It was one of the first movers on the internet with Naukri.com, and has held a strong market share since. All their verticals are easily accessible to customers via mobile and are fairly convenient for consumers.
Infoedge also has strong financials and positive cash flows from Naukri.com which is used for the other verticals. Given the strong growth potential of the company, it is a stock worthwhile considering for your portfolio in the long run. It provides exposure to start-ups which are otherwise inaccessible to retail investors.
The stock is currently trading at Rs. 6675 per share. It is trading at an all-time high even today and has been consistently doing well, more so since 2019. The share price has increased 3 times (from Rs. 2000) in the last two years.
Sensex falls on profit-taking after hitting new record in race towards 60,000
Indian stock markets touched new highs on Friday, with the 30-stock benchmark BSE Sensex coming closer to the 60,000-mark in early trade amid investor euphoria that is now prompting many analysts to advise caution.
The Sensex hit a high of 59,737.32 in morning trade on Friday, up 1% from Thursday’s close. The National Stock Exchange’s Nifty 50 also touch a new record of 17,792.95.
Both indices cooled off subsequently and ended lower. The Sensex ended at 59,015.89, down 0.2% from Thursday's close, while the Nifty 50 ended at 17,585.15, down 0.25%.
The Sensex has soared 132% since crashing to 25,638.90 in March 2020 due to concerns related to the Covid-19 pandemic. The non-stop rally has prompted many analysts to sound a note of caution and warn about a possible correction in coming weeks.
The new record comes barely two weeks after the Sensex climbed past 58,000 on September 3 and 57,000 just three days before.
Kotak, HDFC and Bajaj twins
Kotak Mahindra Bank was the top gainer, ending 5.26% up. HDFC Bank rose 1.5% the Bajaj twins – Bajaj Finserv and Bajaj Finance – climbed, too. Bajaj Finserv ended 0.65% higher after climbing more than 4%. Bajaj Finance closed just 0.2% higher after gaining 3% in early trade. Bajaj Auto, the group’s two-wheeler unit, climbed 0.6%.
Other financial stocks that ended higher include Axis Bank and HDFC Ltd.
Apart from Bajaj Auto, top carmaker Maruti Suzuki gained 1.1%. Bharti Airtel rose after the government announced a moratorium for telecom operators on outstanding payments.
Reliance Industries, India’s biggest company by market value, lost 1.55%.
Tata Steel was the biggest loser, falling 3.6%. State Bank of India, Tata Consultancy Services, Hindustan Unilever and Sun Pharma were the other laggards.
Midcap, Smallcap indexes
In the broader markets, the BSE MidCap index ended 1.14% lower while the BSE SmallCap index fell 1.06%.
Most sectoral indices ended in the red. The only exceptions were the telecom and the bank indices.
The BSE Bankex gained 0.7% while the the BSE Telecom climbed 0.9%.
The BSE Metals index fell the most, by 2.5%, dragged down by Tata Steel. It was followed by BSE Realty and Power indices, which were down by 2% and 1.6%, respectively.