Mahantesh Sabarad’s IPO choices: Nazara and Craftsman Automation

On listing day the price band is not capped and so investors can take advantage of that pre-listing trade, says Mahantesh Sabarad, Head, Retail Research, SBICAP Securities, in an interview with Tamanna Inamdar of ET NOW.

We are seeing a lot of IPOs. Which one looks exciting to you?
There are these new-age technology stocks in the IPO market and that is going to be interesting to watch. It is not really a debate about the old economy versus the new economy. Even certain old economy stocks are adopting digital kinds of mechanisms and transforming themselves into new age companies. The first choice, if one were to do a top-down approach on the IPOs, will be from the technology aspect. Are these companies going to transform themselves into new-age technology driven companies?

The other choice would depend on how sustainable would these companies’ prospects be in future. Remember we are still in the midst of the pandemic and many of the companies including those listed already are underperforming relative to their past performance on the revenue or the profitability front. Some of these companies, which are coming up for IPOs, do not necessarily have a comparative backdrop for investors to understand their value. One has to go into the financials to understand what kind of growth they are delivering. But suffice to say, choice number one has to be driven by the technology transformation they are undertaking and choice number two will be driven by what kind of year-on-year growth they are delivering to experience sustainability.

Kalyan Jewellers, Craftsman Automation, Laxmi Organics, Suryoday Small Finance Bank, Nazara and Anupam Rasayan, all are hitting the market this week. Which of these looks exciting to you?
As a followup of the argument that I placed in front of you, our view is that you should go for Nazara from a choice perspective among all of these because Anupam Rasayan or Laxmi Organics are traditional old economy stocks. There is nothing much to choose from in terms of technology. There are humongous choices available in the chemical space or in the specialty chemical space in the listed universe. So why should one go for an IPO of those kinds of companies?

So I would pick Nazara and maybe Craftsman Automation would be the next pick. But you should remember in the backdrop is that there is also an opportunity available for many of the investors to look at these companies post the IPO listing because the stocks tend to go up even post listing.

Do you agree with that point of view?
Yes, to some extent. For the retail investor, an IPO allotment is more or less like a lottery. You get it or you do not get it. Given the large oversubscription, actual allotment is very small. The best strategy for retail investors would be to look up for quality names within these companies and look at bargains on the listing day itself because on one hand, on the listing day, in a pre-opening market, the price band is opened up and it is free to move irrespective of price band and post listing there is a 20% kind of cap. There is enough headroom available to make your gains during that period and not wait for the listing pop-up and one need not necessarily go through the listing process. The only good news for retail investors is that since you have an ASBA kind of application, you are not really committing your money full-fledgedly behind the IPO and the money is blocked just for a few days.

What is your take on the way some of these issues are priced? Are they priced fairly?
IPOs have a valuation justification. Very often the justification makes use of peer valuation and that means peer companies trading in the market. When you have the market already trading at high valuation levels, obviously the valuation of the company that is hitting the IPO market will be high. So there is an inherent disadvantage in the IPO market because most of the IPOs will come when the market is “hot”. When we say “hot”, it means that valuations are stretched. So from purely a fundamental perspective, that is not the time when a retail investor should be investing in an IPO.

In terms of your financial prospects, the outlook ahead is very important. Having said that, IPOs come during market peaks and we just cannot help it. Is there fairness in that? Probably the fairness would have come if the price band would have been much wider than what it is now. But on the other side, on listing day the price band is not capped and so investors can take advantage of that pre-listing trade.