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The rub-off effect of IPOs on other stocks in the sector

LiveMint logoLiveMint 09-03-2017 Pallavi Pengonda

The initial share sale of Avenue Supermarts Ltd that runs the profitable D-Mart supermarket chain was fully subscribed on the first day of offer.

In the run-up to this much awaited share sale, other retail stocks too are basking in reflected glory. In fact, Future Retail Ltd and V-Mart Retail Ltd stocks have gone up as much as 80% and 83%, respectively in the past two months.

What gives?

Whenever an interesting company approaches the markets with an IPO, there is always a rub-off effect on other stocks of the same sector, said Arun Kejriwal, director of Kejriwal Research and Information Services Pvt. Ltd. Valuations get corrected by improving, points out Kejriwal, adding, “This is a consumption mindset and it has happened whenever a good company is about to get listed.”

Graphic: Prajakta Patil/Mint

It has nothing to do with fundamentals, according to Dhananjay Sinha, head, institutional research, economist and strategist, Emkay Global Financial Services Ltd. “In case of D-Mart, people might think the issue would be over-subscribed heavily and that other stocks of the sector will also continue to do well,” added Sinha.

Also read: D-Mart IPO subscribed 1.36 times on Day 1

According to an analyst, if people don’t know much about a sector and a quality company comes, it leads to reassessment of valuations of listed entities also. A case in point is InterGlobe Aviation Ltd that runs IndiGo airlines and is the most profitable airline. “IndiGo was an airline that was expected to make an annual profit of Rs2,000 crore. No one thought that kind of thing was possible in aviation,” said the analyst. That led to a re-rating of the sector before IndiGo was about to get listed.

Shares of SpiceJet Ltd and Jet Airways (India) Ltd had increased 110% and 36% two months prior to IndiGo’s listing. Sure, lower crude prices also helped sentiments that time. To take another example, valuations of peers such as Yes Bank Ltd and Indusind Bank Ltd adjusted to Equitas Holdings Ltd’s valuations before it got listed.

But the important question is: does the enthusiasm last?

According to Kejriwal, the rub-off effect lasts only till listing and after that it is back to the performance and fundamentals of these companies.

A look at the airlines sector confirms that view. The SpiceJet stock has further appreciated by around three-fifths since 10 November 2015 (the date IndiGo listed). But then, crude oil prices were relatively lower until recent months and domestic passenger growth remained healthy boosting prospects of the sector.

Additionally, SpiceJet has turned around its operations effectively and beaten Street expectations for many quarters during this period. In comparison, the Jet stock has gone up about 7% since IndiGo’s listing, tracking its fundamentals.

The IndiGo stock itself has declined by about a third so far after touching a closing high of Rs1,341.75.

What this means is that after D-Mart’s listing, the focus will shift to same store sales growth for retail stocks. In general, improvement in consumer demand will augur well for retail stocks. Currently, Future Retail trades at 28.5 times Morgan Stanley’s estimated earnings per share for financial year 2018. V-Mart trades at about 35 times estimated earnings for FY18. It goes without saying that if operational performance of these firms doesn’t catch up, it will be difficult to justify these valuations.

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