The market has been very placid for two months now. Low volatility period is always followed by a period of high volatility. So, fasten your seatbelts against some major surprises
India VIX, a volatility index based on the index option prices of Nifty index has collapsed to its lowest level since March 2009, from when the data is available. Market players are assuming that volatility will remain low and the market will continue to be range-bound but the current low volatility may only presage a big surprise (positive or negative) in the coming weeks.
The daily VIX hit its lowest close of 17 on 9th August in these 17 months. The index was around 25-30 on most days in the first two months of the year. The 50-share Nifty had hit 5,367 on 21st June and has moved in a narrow trading range since then. It fell to 5,225 on 2nd July and rose to 5,492 on 9th August and is at around 5,400 at the time of writing this piece. This has been an extremely tight trading band for an extended period of time. As a result VIX, the measure of volatility, is sharply down. How should we interpret this, since low volatility period is invariably followed by a high volatility period?
"Low volatility can have two meanings. One is that the market is becoming very complacent and to that extent people are not expecting wild swings on either side. Therefore, volatility is reducing. People are not taking the market risk into account. The second reason could be that we are in the middle of a new long bull market. Typically, when a long bull market starts, the volatility subsides and remains low for a prolonged period of time. This is what has happened in two bull markets. We could be entering that phase now. As that happens, we could see steady upward move in the market intertwined by corrective phases, like what happened in May 2004, 2006 and 2007," said Sandip Sabharwal, CEO - Portfolio Management Services, Prabhudas Lilladher Pvt Ltd. If Mr Sabharwal is right, the low volatility will be resolved by extreme downside volatility as happened in May-June 2006, before the market resumes its upward journey.
"The market is at an indecisive phase and therefore it is in a narrow range with low volatility. If the market starts correcting you will see more volatility. The market is waiting for some correction," said a Mumbai-based head of an institutional equity firm.
The highest daily VIX was on 19 May 2009 (it hit 56.07), following the decisive victory of the Congress party in the 2009 elections. VIX then slipped to its lowest level on 9 August 2010 to 17. "Lower volatility is associated with stability. The markets are not expecting any huge moves and generally huge moves are associated with falls and not the increments. The volatility aspect is very closely watched but you don't know how low is low," said a Mumbai-based analyst. Jintendra Panda, senior vice president & business associate, Motilal Oswal Financial Services Ltd observes that volatility will remain low in the near-term. "Over the last 6-8 months, the market has consolidated within a small range after an upturn in 2009. The volatility is expected to remain low for the next one or two quarters."
Indian markets, like all emerging markets, are supposed to be more volatile than US markets. But the Indian market has been so placid that it is less volatile than the broad market index, S&P 500 whose volatility index now is around 22 now. On 24 October 2008, fears of a financial meltdown sent the VIX to a historic high of 89.53.
While traders are unhappy that volatility has collapsed and that there are lot of tiny whipsaws now which are inflicting losses, Deena Mehta, MD of Asit C Mehta Investment Intermediates Ltd says that low volatility is good for long-term investors who should not take cues from short-term volatile movements.
"It's good for investors as they will not be in for shocks and surprises. Too high volatility is not considered to be good. Low volatility is good for people who have a long-term view on the market. If you have a long-term view then you are not bothered about short-term shocks. People who have a short-term view of 15-30 days are not happy with low volatility as there are fewer opportunities to enter and exit in the market."
Its post-issue equity dilution PE works out to 10.80 (at the upper band) and 9.82 (at the lower band) based on the EPS of FY10, while industry average PE is 16.70
Mumbai-based Prakash Steelage Ltd (PSL), a manufacturer of seamless & welded stainless steel pipes, tubes and U-tubes, hits the primary market on 5 August 2010 to raise Rs62.50 crore-Rs68.75 crore. PSL has fixed the IPO price band at Rs100-Rs110 per share. The company is offering 62.50 lakh shares at a face value of Rs10 each.
Qualified Institutional Buyers (QIBs) and Non-institutional Investors (NIIs) have been allotted 30.75 lakh and 9.22 lakh shares respectively. Retail investors will be entitled to 21.52 lakh shares.
PSL's production is done at its two units situated at Silvassa and Umbergaon with total installed production capacity of 12,200 metric tonnes per annum (mtpa).
The issue opens on 5th August for QIBs and closes on 9th August. Bidding for retail investors and NIIs closes on 10th August.
For the year ended 31 March 2010, PSL's EPS (earnings per share) was Rs15.84. The industry average PE stands at 16.70. At the end of the last fiscal, its debt-to-equity ratio stood at 2.77:1.
With the post-issue equity dilution, the PE works out to 10.80 at the upper band and 9.82 at the lower band, based on the EPS of FY10.
PSL reported a net profit of Rs17.82 crore on net sales of Rs437.10 crore for the year ended March 2010. Its total income stood at Rs438.38 crore for the same period.
Following a search-and-seizure conducted by Income-Tax authorities in February 2009, the company filed a voluntary declaration of undisclosed income to the tune of Rs15 crore for which it paid Rs4.87 crore as tax on 25 February 2009.
On 6 July 2009, the company again received a notice under the provisions of Section 153(A) of the Income-Tax Act, 1961, directing it to file a true and correct return of total income for the assessment year (AY) 2003-04, AY 2004-05, AY 2005-06, AY 2006-07, AY 2007-08 and AY 2008-09 from the I-T Department.
PSL plans to buy plant & machinery worth Rs33.67 crore and other fixed assets worth Rs1.68 crore from the proceeds of the IPO. As on 31 March 2010, the company had an outstanding unsecured loan of Rs42.80 crore.
The IPO proceeds will also be used to fund expansion of its existing manufacturing facility at Umbergaon at a cost of Rs48.55 crore, and meet additional working capital requirements.
Keynote Corporate Services is the lead book running manager to the issue. Rating agency Credit Analysis & Research Ltd (CARE) has assigned an 'IPO Grade 2' to the proposed offering, indicating 'Below Average' fundamentals.
Its competitors have a PE between 22.80-42.90, while Bajaj’s PE works out to 22-23 on a post-issue EPS basis
Hair-oil producer Bajaj Corp Ltd is entering the capital markets with its initial public offering (IPO) to raise Rs283.50 crore-Rs297 crore through a 100% book-building issue. Bajaj Corp Ltd is a part of the Shishir Bajaj Group of companies with operations in consumer goods, sugar, power generation and infrastructure development.
The issue opens today and closes on 4 August 2010 for qualified institutional buyers (QIBs). The bidding for retail and non-institutional investors (NIIs) closes on 5 August 2010. The price band has been fixed at Rs630-Rs660 per share. The company is issuing 45 lakh equity shares of Rs5 each. Retail investors will be allotted 13.50 lakh shares.
The earnings per share (EPS) of Bajaj Corp for the year ended 31 March 2010 stood at Rs33.57. The company will use Rs220 crore over the next three years to fund its future projects and will use Rs50 crore for acquisitions and other strategic initiatives. It plans to launch four products in the personal care segment.
The average price-earnings (PE) ratio of the fast-moving consumer goods (FMCG) industry is 32.85. Bajaj's competitors like Marico, Dabur India, Emami and Godrej Consumer have PEs between 29.90- 42.90.
"The company is bringing the issue at a price band of Rs 630-Rs660 per share which will turn into a PE multiple of 22-23 at post-issue EPS on FY10 basis of Rs28.44. The company has posted strong growth in its financials over the past couple of years," said a research report from Hem Securities.
Bajaj Corp recorded net sales of Rs330 crore for the year ended 31 March 2010 with a net profit of Rs83.90 crore, which translates into a net profit margin (NPM) of 25%. It has spent Rs17.90 crore in FY09 and Rs27 crore in FY10 for its advertising and brand-building activities. Its 'Almond Drops' hair oil contributed 92.4% and 93% of its total sales and gross profit respectively for the year ended 31 March 2010.
Bajaj's competitor Marico reported a net profit of Rs74.70 crore on net sales of Rs790.15 crore, posting NPM of just 9% in the first quarter of the current financial year. Godrej Consumer Products (GCPL) posted a net profit of Rs116.39 crore with net sales of Rs645.28 crore with NPM of 18% in its June quarter results. Dabur, another competitor in the hair-oil space, reported a net profit of Rs107.39 crore with net sales of Rs925 crore, recording NPM of 12%. Emami Limited, which has over 30 brands under its umbrella, had net sales of Rs1,037 crore with a net profit of Rs169.73 crore, (NPM of 16%) for the year ended March 2010. Clearly, Bajaj Corp's net profit margin is among the best in the industry.
According to the Nielsen Retail Audit Report, the 'Almond Drops' brand has increased its market share in the Indian light hair-oil market to 50.3% in FY10, from 46.5% in FY09. Bajaj Corp sells 'Bajaj Almond Drops', 'Amla Shikakai', 'Brahmi Amla' and 'Jasmine Hair Oil' brands. 'Almond Drops' is the flagship product of the company. It also produces oral-care products under the brand name 'Bajaj Black Tooth Powder'.
Kotak Mahindra Capital is the sole lead book running manager to the issue. Rating agency CRISIL has assigned an 'IPO Grade 4' to the issue indicating 'Above Average' fundamentals.