As we start 2016, let’s try and understand the prospects of investing profitably in Equity Initial Public Offerings (IPOs)
There are a few important factors to consider. First let us look at the positive aspects
1. Earnings growth expectation from corporate India
Corporate India’s earnings growth is expected to recover to low double digits in FY16 and move up sharply thereafter, bringing an end to the earnings downgrades cycle which began from FY12, as you can see from the chart compiled by
Source: CLSA Research
The factors which may drive earnings growth is the ongoing recovery in urban consumption, which is due to a steep wage hike for government employees as per the Report of the Seventh Pay Commission.
Sectors such as consumer durables, automobiles, and electronics could witness better growth rates as government employees spend more of their increased salaries.
2. Macro-economic situation
With record low oil (currently crude is quoted at around 28-29$ per barrel) as well as soft commodity prices the prospects for further rise in the consumer inflation (CPI-consumer price index) seems limited. The government has also taken some meaningful steps to arrest the food prices (particularly vegetables, pulses and fruits). As long as the central and state governments remain vigilant on this, there may be chances of keeping the inflation in the range of 5.5 % to 6.5% (which is the range which RBI has projected)
This in turn may help RBI to keep interest rates stable, which will in turn have a positive impact on corporate earnings.
3. Ease of doing business
Over the last few months, the government has made efforts to reduce the number of approvals required to set up business, in a bid to attract investments from domestic and foreign investors.
4. Increased government spending
The government has increased spending outlays in roads and railways and further steps in the union budget due in February will increase confidence levels in the economy.
5. Budget 2016
This will be the most closely watched event and the government is expected to present a growth-oriented budget, which will set the tone for the continued optimism in the economy in general and in the equity market in particular.
6. IPO Pipeline of companies
There is a healthy pipeline of companies which intend to offer equity to the public through the IPO route in the next 12 months. This includes big names such as the Indian arm of the global telecom giant Vodafone and many others.
There is a strong amount of investor appetite for Initial Public Offerings as well as can be seen from the success of recent issues like Inter globe aviation (Indigo airlines), Narayana Hrudayalaya, Alkem labs etc.
While all the above factors portray the reasons for the year 2016 to be a profitable one for investors, one must also keep an eye on certain factors which may play spoilsport.These are:
There has been a back to back drought in rural India for the last two years. This has muted rural demand and growth.
It is hoped that this year, the monsoon will be normal, which will help the economy in generating demand and will boost earnings of companies which are dependent on the farm sector like Tractors, two-wheelers, fertilizers, construction, consumer durable, fast moving consumer goods (FMCG).
2. Fiscal deficit
A lot depends on the government position whether they stick to the 3.5% target for FY 17 or whether they are willing to raise this. This would be clear in the Union Budget
3. Global growth
Globally growth is unlikely to be as robust as projected last year and hence companies dependent on exports and foreign revenues may not see much of a recovery. Last month’s developments in China of reduction in GDP growth due to over leveraging is an example. However, China still has a huge domestic market of over 1 billion people and the government can encourage domestic spending.
4. US Federal Reserve
The stance of US Fed on further interest rate hikes in 2016 and its impact on global equity markets would also need to be carefully watched.
So, the overall picture from an investor’s point of view is positive and profitable opportunities are expected to emerge in 2016.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.