When OFS at
a steep discount to rich valuations is foolish but giving up undervalued shares
at a hefty premium is wise
Happy days
are here again for investors. They are spoilt for choice. The options for
deploying surplus to earn returns beating low-yielding fixed income instruments
include IPOs, FPOs, OFS and rights issues from companies in sectors ranging
from tech services, financial services, chemicals, banks, capital goods, media
and entertainment, and PSUs. Buybacks and delisting are opening avenues
for monetization of assets. Bonuses and dividends are suggesting still better earnings
ahead. Large-, mid- and small-caps have recovered more than half from their
March lows. Shaving off a near quarter of the GDP in the April-June period due
to a complete, 21-day nationwide lockdown has been shrugged off as the bottoming
of the economy that is since June unlocking bit by bit. In previous instances
of economic contraction, only the defensives seemed appetizing, and that too
for their dividend yields. Now buying is spread to tech players for their role
in connectivity, producers of cheap generic drugs, pockets of automobiles coming
back on track due to rural prowess propped up by a bumper rabi harvest and easy
credit, chemical makers reaping the benefits of good rains and metal manufacturers as factory operations resume.
Investors
have never been more confused. The choices available call for suspension of
belief or junking of time-tested strategies. State monopolies look attractive in
the absence of competition. With privatization being embraced even in defence
to become self-sufficient, doubts about the sustainability of the pole position
cannot be brushed aside. Emerging businesses have no comparable Indian peers.
Their uniqueness disappears on realization that customers are based in mature
markets. Deal wins hinge on undercutting rather than on superior technology. The
high discounting demanded by those entering a crowded field, often more than
legacy businesses, is like flipping a coin: Re-rating for established
enterprises or an indictment of the flattening growth after decades-long
existence. Investors have a difficult task. Bumper gains by hitching on to those
spotting gaps in the market comes at the cost of reshuffling the portfolio by
shedding similar assets to ensure that weights assigned to different sectors
remain undisturbed. The outcome of being taken up by the conventional theory of
the track record being a guide to the future can mislead. The FPO of a private bank,
facing a run a few months earlier, received a warm reception from institutional
investors despite being hawked 51% below the traded price, perhaps drawing
comfort from the 30% premium to what a clutch of public and private banks had plonked
three months earlier in a government-shepherded rescue. The stock, which was up
250% even at the bleakest point post the strategic investment at 61% off the level
just before the outbreak of the current pandemic, is hovering near the issue
price. Instead of being an opportunity, a low-cost entry can be a trap. Presence
of quality investors can be an assurance as well as a bait.
Increase in
the number of shares available for investing should ideally lead to better
price discovery. The understanding received a rude jolt after the co-owners of
an MNC subsidiary offered do divest part of their stake at 33% discount to the market
quote. At first glance, the move smelled of desperation for funds. Not only
that, knocking down the valuation by one-third sent a message of no-confidence in
the historical performance of absolute
2,600% returns to the Rs 6900 level in five years and P/E in triple
digits even as revenues recorded a modest CAGR of 20% in the period. Rewind to
a few days earlier, and some clarity emerges. The Indian company wanted money to
acquire the parent. Instead of lauding the controlling stakeholders for being realistic
about the impact of the 25% float on valuation, there was a stampede to exit. The
oversubscription, once more driven by big-ticket funds seemingly attracted by
the projections of revenues to go up 40% and the operating margins to 16% from
13% in four years, encouraged the promoters to bump up their offloading to 20%.
Another unlearning was about cutting losses. If the ordinary shareholders of a
tech solutions provider had followed the dictum and not stayed put despite range-bound
price movements for more than two years, mediocre returns ratios, sluggish sequential
revenue growth and industry median margins, they would not have reaped 78%
gains in the three months since delisting was announced and completed. The
victory might turn out to be illusory after figuring out if the willingness of the
British equity group to pay 67% more than the indicative price, which was 37%
above the annual bottom, suggested the possibility of being short-changed.
-Mohan Sule
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