Market volatility singes newly listed firms

Demonetisation and the resulting market turmoil have taken a toll on companies that have listed on the bourses from the beginning of 2015, with nearly half the 43 firms underperforming the benchmark indices since the currency freeze on November 8.

About 44% of these companies are trading below their issue price, although 70% of them had ended with gains on the first day of listing. The benchmark Sensex has slid 6.3% since November 8.

“Companies that hit the market with valuations solely dependent on the future earnings potential, business trajectory and post-money valuation, will correct (fall) significantly in this market,” said Gopal Agrawal, investment head at Mirae Asset Global (India). “Domestic institutional investors, confident of the earnings potential of these firms, may use the correction for buying.”

Post-money valuation is a company’s value after outside financing or capital injections are added to its balance sheet.

Companies that have seen the largest erosion in their share price since November 8 are HPL Electric & Power (45%), Ujjivan Financial Services (21%), Adlabs Entertainment (18.4%), TeamLease Services (17.5%) and GNA Axles (17%).

Health care companies were relatively insulated from the fall, with Alkem Laboratories (7.4%), Thyrocare Technologies (3.1%), Healthcare Global Ent (1.4%), Narayana Hrudayalaya (1.1%), Advanced Enzyme Technologies (1.1%) and Dr Lal PathLabs (0.4%) making modest gains.

The primary market got a boost after a new government came to power in May 2014. In calendar year 2015, 21 companies mopped about Rs 14,000 from Initial Public Offers (IPOs) of equity. This year, 26 companies have hit the market, raising a little more than Rs 20,000 crore.

Unlike previous years, a lot of new-age companies in information technology, health care and micro finance have tapped the market. According to experts, the quality of issuances have been generally good -- many of these entities, particularly those that hit the market in 2015, left money on the table for investors.

The quality of issuance, however, has not taken away the risk that comes with investing in the newly listed companies. “Investing in IPOs comes with a greater risk than putting money in listed companies,” said Pranav Haldea, managing director, PRIME Database. “In any case, retail (small) investors don’t have the time, bandwidth or understanding to research stocks, and are better off coming through the mutual fund route.”

He added, however, that only because these firms had tapped the market recently did not mean that institutional investors had lesser faith in these, compared to those listed for a longer period. “Once a company gets listed, it behaves like any other listed firm, and its stock will move depending on its own fundamentals, business outlook and macroeconomic factors,” he said.

The move to ban high-value currency is widely expected to significantly impact consumer-centric companies as consumers scrimp on discretionary purchases. Real estate and entities related to construction activity are also expected to take a big hit. The current turbulence also threatens to choke the flow of upcoming IPOs and derail possible strategic stake sales by the government in the coming weeks. Investment bankers say if the situation does not improve in the next week or so, IPOs might get deferred to the next financial year. Approval of seven IPOs worth Rs 2,500 crore might lapse in the next three months if they don't hit the market, data show.