Home / Market / Mark-to-market /  The rub-off effect of IPOs on other stocks in the sector

As expected, the initial share sale of Avenue Supermarts Ltd, which runs the profitable D-Mart supermarket chain, has generated much demand.

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 78% and 64%, respectively, in the past two months.

What gives?

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

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

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 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 rerating of the sector before IndiGo was about to get listed.

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

Shares of SpiceJet Ltd and Jet Airways (India) Ltd had gained 110% and 36%, respectively, two months prior to IndiGo’s listing. Sure, lower crude oil 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 two-thirds 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 Airways stock has gone up about 5% since IndiGo’s listing, tracking its fundamentals.

The IndiGo stock itself has declined by almost 35% so far after touching a closing high of Rs1,341.75 on 1 January 2016.

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 times Morgan Stanley’s estimated earnings per share for fiscal year 2018. V-Mart trades at about 32 times estimated earnings for FY18. It goes without saying that if operational performance of these companies does not catch up, it will be difficult to justify these valuations.

Pallavi Pengonda
Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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