The hot Indian IPO market

Dated: 4th of July, 2017

The portfolio was up 0.65% Dollar terms for the month of June, 2017, compared to the investible Indian index, Nifty 50, which was down -1.34%.


Nothing  much could be said about why the portfolio was up this month apart from  the classification that the active share of the portfolio against the  benchmark is extremely high (there is little or negligible commonality  between portfolio holdings and benchmark composition) and therefore  there may be numerous times when relative returns may or may not make  much sense unless there is a bear market ongoing. Stock specific risk  will be, at most times, the primary risk factor that the strategy wishes  to carry. I do not see much more ways to outperform the investible  alternative over the long term. 


There have  been absolutely no changes to the portfolio over the month of June. No  buy or sell (even partial ones) decisions have been made whatsoever. I  could not find any valid reasons to make any changes to the portfolio  and without it, it will only be my trigger happy fingers doing the  talking. 


More than three and half years  into performance history, the strategy has managed to outperform the  investible alternative by 6.7% annually as of June, 2017 end. I must  confess that I had hoped for a better result when I started out. I would  have been more happy with a ~10% annualised out-performance. Hopefully,  the lack of relative returns be covered in the coming years with better  stock selection and avoidance of stupid mistakes and actions. Without  some pretty glaring mistakes, I would have had atleast 20% more returns  by now (just taking into account my committed errors).


The  Goods and Services Tax (or better known as GST) came into effect on the  30th of June, 2017. Without being a tax expert, my understanding  suggests that there would be nominal impact on the organised sector in  India (including all public listed companies). Fears of unfair price  increase of products due to increased taxes are simply not true most  probably. However, the unorganized sector will have to operate under the  tax jurisdiction now and hence it can be assumed that GDP may have an  upward impact somewhat (first from increased tax revenues and second  from more recognition of economic activity previously operating in the  untraceable cash market). Lower corruption from tax officials and ease  of logistics would probably take India's 'Ease of doing business' indicator a notch higher. 


Atleast  I am glad that India does not have a legislative situation where laws  and bills circulate within lawmakers in a top secret hush hush manner.   "It's a great bill, this GST, and it will be very good for the country and it will do great things for USA... err India".


Indian  equity markets have become a hot bed for IPOs in 2017. Listing day  returns of ~75% (CDSL IPO) and ~115% (Avenue Supermarts IPO) have been  touched till now. Even though as a policy, KGS does not and will not  invest in IPOs (what is good now will be good later as well and we like  to place our bets knowing our odds), I have had a chance to look at the  red herring prospectuses of some of the recent IPOs that have come to  the market.

 

My initial impression is that,  firstly there is an enormous game being played by institutional  investors with payoff structures on the listing day (out of the hands of  retail investors). Some of the issue prices have been structured in  such a way that listing day create lot of hotness and buyer liquidity  enabling big IPO players to exit in a smooth manner. Some blame also  needs to go to the retail investors trying to play the IPO game as a one  day hunting expedition. As more IPOs enter the Indian market in 2017,  these issues are likely to become a gambling market in itself (many  retail investors rarely study the fundamentals of a company before  investing, with IPOs, many absolutely won't bother about the business  behind it). Subscription multiples is the main qualifying criteria for  them. It's similar to 100 retail purchase managers running toward a  warehouse with a disguised sale on, where each person sees the other  running towards the door and no one bothers what they are buying.


Jaw  dropping valuations of recent IPOs (one trades at 5x the multiple of   comparable stocks) however may not mean that there is enough buyer  liquidity for the entire system in India implying an indication of  extreme froth. The IPO phenomenon probably is a different liquidity  provider altogether as data suggests that longer time frame returns of  IPOs in 2016 and the recent past have been mediocre (the suckers win  while the sucked lose eventually, and rightly so). 


Changing  the vantage point, it may also be true that we are in the midst of an  prolonged ensuing bull market and those companies which consider IPOs  this year also run the risk of lower than possible equity fund raising  (in case the business in question in not that sound enough to begin  with). In any case, fundamental quality will likely determine both the  fate of promoters/ owners and also their shareholders over the long term  because market optimism may cover a mediocre businesses's naked butt  for a while but when its time to kick, that same butt will hurt more. 


​It is strange how instant glory always finds precedence among mortal beings over long term enduring fame.