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Grey market premium highly unreliable, irrelevant; check these 2 things while applying for IPO

March was a busy month for Dalal Street, with a flurry of IPOs. However, while some initial public offerings presented investors with a listing benefit bonanza, others disappointed allottees, highlighting the disconnect with the prevalent grey market premiums. Easy Trip Planners, for example, was recently classified and received 159 subscriptions thus quoting a high grey market premium. However, on the first day of trading, it opened at a lower level than anticipated. So, how does an investor research a company before filing for its initial public offering (IPO)? HDFC Securities’ Deputy Head of Retail Analysis, Devarsh Vakil, said.

When applying for an IPO, it’s important to remember that grey market premium quotes are inaccurate and unsuitable for long-term investments. Devarsh Vakil claims metal stocks have more upside potential in the new fiscal year. The public sector should also be considered, as progress on disinvestment and privatisation will hold this sector in the spotlight in the coming fiscal year.

1. With so many IPOs in March, do you think grey market premium should be considered while applying?

Whether it’s a new secondary market investment or an IPO application, three considerations should be considered: the company’s growth potential, the efficiency of its management, and its financial health and valuation. Premium quotes from the grey market are highly volatile and meaningless for long-term investments.

2. Given the increasing COVID events, bond yields, and ongoing vaccination campaign, where do you see the Sensex, Nifty, and Bank Nifty in the new fiscal year?

Economic activity is steadily picking up after being slowed by the Covid-19 pandemic, and it is projected to rebound significantly in the financial year 2021-22. The Reserve Bank of India has maintained a loose monetary policy and has done a decent job of keeping corporate borrowing costs down. The government has agreed to raise GDP growth by growing capital spending in the federal budget. This latest economic growth cycle, we expect, will continue for many years.

The economic recovery will accelerate as a greater portion of the population is inoculated against the Covid-19. Future earnings growth is anticipated by investors, who discount it in advance by valuing it at an appropriate interest rate. A recent correction in global markets occurred as a result of a rise in US bond yields (spiked over 50 bps since January-end). When opposed to cyclical and value stocks, high-flying growth stocks seemed fragile. On their way up, all bull markets experience several small and major corrections. Benchmark indices still have some space to correct, but we believe Indian stock markets are going higher in the long run due to earnings growth.

3. Do you believe the momentum in mid- and small-cap stocks will continue in the coming fiscal year, and why?

Lower financing costs and a recovering economic cycle would favour mid- and small-cap firms. Investors are looking for opportunities in the mid and small cap space because of improved business growth prospects and profitability. Mid-cap stocks are now as expensive as large-cap stocks in terms of price. As a result, returns would be modest and commensurate with earnings growth.

4. For FY22, what are your overweight and underweight markets, and why?

This rally is led by the pharmaceutical and information technology industries. Government initiatives such as Atma-Nirbhar Bharat and the PLI schemes provide manufacturing companies with unique opportunities to expand. Metals, we conclude, have more upside potential. The progress on divestment and privatization would put the public sector in the spotlight this year. Banks and automakers may have a hard time rising materially and may underperform for a while.

5. What factors are likely to drive stock markets, and what are the major risks?

Earnings are the master of stock values. Future earnings growth is anticipated by investors, who discount it in advance by valuing it at an acceptable amount. The reversal of quantitative easing (QE) by central banks has resulted in a global liquidity contraction; a faster-than-expected rise in inflation will push policymakers to lift interest rates. Bond yields may be a party pooper for stock markets if they increase significantly from current levels. Many pension and endowment funds have withdrawn their funds from the stock market and invested them in bonds. Aside from that, we have the additional uncertainty of the monsoon and the impending monsoon season in India.

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