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Retail investors back on IPO gains, earnings

Retail investors back on IPO gains, earnings

Mumbai: Pankaj Sharma, a sales executive at Marathi newspaper Pudhari in Mumbai, stopped trading in stocks a few months ago because he “couldn’t get good returns". As “things have changed and the market is stable", he is now back in the market. “There are also many IPOs (initial public offerings) coming up, which offer a good opportunity," he adds.

Sharma is one of the many retail investors who have returned to the equity market, buoyed by listing gains in new share sales and hopes of strong returns on the back of higher corporate earnings.

Unlike in the past year, when many firms, including Adani Power Ltd and NHPC Ltd, had disappointing debuts in the market, the three firms that have listed on the bourses so far in 2010, have offered handsome returns on listing. DB Corp. Ltd, a newspaper publisher, gained 25% on listing, while Godrej Properties Ltd opened trading at a 9% premium. The latest one to list, MBL Infrastructure Ltd gained 14.3% on listing day.

Till recently, retail investors were reluctant to trade in equities after burning their fingers in the crash of 2008. In fact, investors in mutual funds exited their investments in the last four months of 2009. These investors had bought mutual fund units in early 2008 at the peak of the market and, after the crash and subsequent recovery, were happy to exit with marginal gains, even lower losses.

The number of new investors—a statistic that can be gauged from looking at the number of demat accounts—is increasing too. Data from two Indian depositories—National Securities Depository Ltd and Central Depository Services (India) Ltd—shows that on an average 180,000 new accounts have been opened every month, net of closures, in the second half of 2009, compared with 76,000 in the first half.

Many investors open such accounts because they want to subscribe to new share sales or IPOs. The scope in this space is only widening. At least 63 companies have filed draft prospectuses with market regulator Securities and Exchange Board of India (Sebi), to sell shares, according to Prime Database, a New Delhi-based primary market tracker.

Industry experts also expect a surge in the number of new demat accounts because of the government’s disinvestment plans, through which the Centre expects to raise at least Rs30,000 crore. State-owned firms already listed on the exchanges, including NTPC Ltd, NMDC Ltd, Steel Authority of India Ltd and Rural Electrification Corp. Ltd are selling more shares, while others such as Bharat Sanchar Nigam Ltd and Satluj Jal Vidyut Nigam Ltd are planning new share sales.

While the number of new demat accounts being opened is an indication of new investors’ entry into the market, the rising volume in the cash segment (the other is the derivatives one) and the growth in margin financing books of brokers and non-banking financial companies (NBFCs) indicate renewed interest of existing investors.

“People (retail investors) are coming back and numbers are increasing," said Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd. “There is still that ‘left out’ feeling (of having missed the rally). But markets are stable now, the comfort level is there and that’s what’s driving retail interest."

“In the last fortnight, interest in the cash segment has improved," which is a sign of increasing non-institutional participation, said Trivikram Kamath, executive vice-president at Kotak Securities Ltd.

Daily volumes in the cash segment have averaged 1.56 billion shares in the past 10 days, a level not seen since September.

The return of retail investors is also led, in part, by day traders such as Amit Patel coming back to the market. Patel, who works in a software firm, said “there are many opportunities for day trading, especially in small and mid-cap stocks".

Indeed, the broader indices have outperformed the benchmark Sensex in recent months. The BSE Mid-Cap Index rose 7.64% in the last month and the Small-Cap Index 12.64%, compared with the 2.85% rise in the Sensex.

Some of the small- and mid-cap stocks have risen phenomenally in past one month. For instance, Gujarat NRE Coke Ltd has posted a 38.7% gain, while Sterlite Technologies Ltd improved 33.37%.

The rise in volumes is also a result of high networth individuals trading in these categories, said brokers. One piece of evidence for this is the rise in the margin financing or investors borrowing money to buy stocks.

Sebi allows up to 50% of such financing. Investors pay a certain portion for the stocks they buy and borrow the rest from brokers or NBFCs. The collateral for the funds being borrowed is the securities in the investor’s account.

“The number of accounts opened for accessing such funds has increased and the (margin financing) book is increasing at a healthy rate," said Nandip Vaidya, president of retail broking at India Infoline Ltd.

Divyesh Shah, who heads Indiabulls Financial Services Ltd’s securities arms, said the firm’s margin-funding book has increased by one-third compared with a quarter ago, but declined to disclose numbers.

The Sensex has gained 115.49% since its lows of March. A survey of nine broking houses by Mint disclosed that all of them expected Indian firms to post double-digit profit and revenue gains for the three months ended December. The first set of results from India’s second largest motorcycle maker Bajaj Auto Ltd and Infosys Technologies Ltd confirm this trend.

Bajaj posted a 189% growth while the software bellwether beat the Street’s expectations and raised its guidance for fiscal 2010.

The Index of Industrial Production grew at its fastest pace in 25 months in November, reinforcing growing perceptions among investors and analysts that the Indian economy is back on track. That could explain why, despite wholesale price-based monthly inflation rising to 7.31% in December, higher than the central bank’s projection for March, the Sensex rose 0.43% to close at 17,584.87 on Thursday.

Ashwin Ramarathinam contributed to this story.

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