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ICICI IPO Oversubscribed; Dollar may drop; Buy yourself some portfolio insurance

ICICI Bank’s mega issue is fully subscribed on its opening day. According to NSE’s web site here are the stats (19/6/07):

  • Institutions have already oversubscribed their part of the issue, by over 5.47 times. Both domestic and foreign institutions have bid for massive amounts of shares.
  • Corporates and HNIs have nearly oversubscribed their bit. Of 1.4 cr. shares reserved for them, they’ve already bid for 1.36 cr. shares. Most of this has come from corporates.
  • Retail and Existing shareholders have applied for less than 1% of their reserved quota. There are three more days and I expect this part of the issue to get more interest by the last day.

Overall this has huge implications – firstly, that there is a heck of a lot of money in the markets – it just absorbed two issues worth Rs. 18,000 cr. without so much as a sneeze.

Secondly, a large part of the bidding has come from FIIs, which I guess will eventually mean about 10,000 cr. coming into the markets just from DLF and ICICI’s local issue. Add about 10,000 cr. for ICICI’s U.S. issue, Sterlite’s $2 billion means another 8,000 cr. About 28,000 cr. just in these three companies, and there are more IPOs, regular investment etc.

What does that mean for the dollar/rupee? The RBI has allocated about 110,000 cr. for the “Market Stabilisation Scheme”, money taken against bonds and used to buy dollars and pay rupees instead. This is to counter inflation (if they didn’t give bonds they would have to print more rupees, which adds to inflation). Now as of the latest annual report the RBI has already allocated 78,000 cr. They can’t mop up this money and stay within limits for the rest of the year, and they won’t print more rupees because of inflationary concerns. So in all likelihood the rupee will rise. That means exporters – IT sector, Pharma and many others – will see a pullback.

Lastly, with so much money going to IPOs, will FIIs pull back on market investments? A good part of money flow comes from FII money and the lack of it is going to affect prices, and negatively so.

Add to this the concerns on high interest rates. The next quarter’s results are going to be out starting the first week of July; and they will perhaps show the trend. But all this is temporary – the dollar will stabilise at some point, the interest rates will turn back and the juggernaut of our economy will move on. There may be one or two quarters of slowing growth, but that should not be a huge problem for you – think of the amount of time left for your retirement!

Now if you think you want to protect yourself against a temporary blip, why not buy “insurance” instead? Let’s say the stock market could fall 10% but you want to cover yourself at 5-6% instead. Buy put options on the nifty for 4000 (the Nifty is at 4200 today) of the 26 July expiry date. Each option is worth Rs. 64 right now, so you will have covered yourself for a Nifty below 3936. You can buy Nifty options only in piles of 50 each (a “contract”), so you will pay Rs. 3200 (plus commissions, depends on your broker) per contract. How many contracts should you buy? Buy enough to cover your portfolio – each contract covers around 2 lakhs (4000×50) so if you have a portfolio of 10 lakhs you should not buy more than 5 contracts. (You can buy less to get less insurance)

But insurance comes at a cost – nearly 1.6% of your portfolio has to be paid to cover the cost of the put. Plus, the put deteriorates in value for every day that the Nifty stays above 4000. And if it expires useless (i.e. Nifty at 26 July is above 4000), you’ve lost Rs. 3200 per contract. Still, this is a useful thing if you think the market will lose its sheen temporarily.

The other thing you can do is to sell futures – sell the July future contract at 4200, and if it goes down, you are covered. Yet, the futures contract involves higher margin money for each contract: about Rs. 20,000. Also, if the Nifty rises, you must pay out the difference between your purchase price and the price at expiry; if the Nifty reaches 4300, you’ll pay out Rs. 100 per share (x50 = Rs. 5000 per contract).

Finally, of course, you can also sell out your shares and sit in cash. Not advisable for a) transaction costs and b) taxes that may apply. Still, it’s better than buying insurance, because the best insurance is cash.

  • hari says:

    >Hi deepak,

    I have sold almost all my IT stocks. The only problem is that i hold an IT bluechip for a sizeable amount. I am unable to sell it as of now because I would incur a 8% loss in it as of now. So what I am doing is waiting for the Q1 results,which might not be that bad since the rupee has been hedged. May be that this rupee rise will have an impact in the succeeding quaters. So once the stock price goes above my buy price even by a rupee,I will completely exit that counter.
    If my assumption is wrong please tell me. Because as you said I feel at the moment being on cash is good.


  • Manickkam says:

    >I have some stocks of TCS and its decreasing every day. I will incur around 8-9% loss if I sell now. Waiting for it to increase as it is one of the frontline IT stocks.

    Also I have some Infosys, I guess the results for the quarter will be good for Infosys and then I can exit this stock.

    I also feel being on case is good now. Tell me your suggestion on this?

  • Deepak Shenoy says:

    >Hari, Manickkam: There are certain fundas I have learnt – that you should not be afraid to book a loss. When you hear yourself saying “I will sell this stock even at Rs. 1 profit but I don’t want to sell now because I will have a x% loss” – that stock is not worth holding.

    In my experience, when such statements come the stock is likly to bounce back JUST below your buy price and then fall further because there are hundreds of people who will sell at a Rs. 2 loss while you wait for a Rs. 1 profit.

    But it’s your call – if you think the results will be great you might want to hold. But don’t hold thinking that you will sell when it comes to your buy price – hold only if you think you can be significantly profitable. Because there are other better opportunities in the market (L&T, BHEL)

  • Anonymous says:

    >Looks like gamblers/speculators talking to one another.

    Buy and Hold if you have the guts. Thinks as long term investor.

    You may be surprised IT companies may come up with ideas to reduce cost.

  • Deepak Shenoy says:

    >Anon: Talk about guts and glory work better in movies. In real life, it only works where you have control – and investors rarely, if ever, have control of the companies they invest in.

    If you don’t have the control, all you can do is get out when it looks disastrous, or buy insurance.

    IT companies may cut costs, but that does not help them create growth stories or make them command very high P/E multiples. Raw material – in this case, people and their salaries – is not a good place to save costs, because it breeds insecurity and eventually the flight of the best raw material to greener pastures.

    If you want to stay on, it’s your call – obviously you expect to make windfall profits someday. As I said, it’s not the end of the story – you just need to buy insurance to keep risks at bay, especially when the risks are visible.

    Now the irrational exuberance has truly started. Let’s see where it goes.

  • Anonymous says:

    >Good luck. Keep on buying Nifty puts every month and throw money into water at expiry (since India does not have long dated options like QQQ).

    Alternatively, exit, sit on cash and don’t repent if the stock went up after you sold. You are not GOD.

    The best course, as long as you know it is a reasonably sound company, just hold on, go thro’ short term pain, you may come out winner. BTW Buffet still holds Coca Cola which he bought probably 60 years back.

  • Deepak Shenoy says:

    >Warren Buffet is different in the sense that he does control his companies. If you invest the way Buffet does, you shouldn’t bother about the market. And by the way, no tech stock in India would be a “buffet investment”!

    Also Buffet starting buying Coca Cola in 1998.

    Third: I will analyse the strategy of buying puts to insure your investment over a 60 month period and see if that helps. Still, I only recommend such things if there is a bad situation in the visible horizon.

    Lastly, do note that other people can have different philosophies, and it’s entirely possible that some will do better or worse than a buy-and-hold. What I’ve posted here is my view and I will the first to admit I was wrong, if I am.

  • sushanth says:

    >Hi Deepak,

    I have a basic question on the basis of applying short term capital gains tax on a transaction.
    If I already own x shares of ICICI bought in 2005, and now in the FPO i get y shares alloted. After listing if i sell some shares, does ST capital gains apply to that?

    I know you don’t recommend ICICI, one of the reason being customer service, etc. I have been transacting with ICICI since 1999 for everything starting from loans, demat, savings acct, etc. I never had a bad experience till date. Additionally i have got good returns on from its stock, and i just hope you are wrong this time 🙂

    Thank you.


  • Deepak Shenoy says:

    >sushanth: Capital gains applies in a FIFO manner (first in, first out). Let’s say you sell your x shares which you bought in 2005. Those are bought first, so govt. will say you sold those first, so no capital gains applies (ltcg=0)

    but if you sell all your holding now, the first x shares are considered long term, and the second y as short term. (Consider each set of shares purchased on a date as a “lot” – you start selling with the oldest lot going first. Each lot is then either short term or long term.

    I don’t recommend ICICI but if your experience is good, you shoudl go for it! In fact I have been wrong a number of times and in this case, the stock has really grown beyond my imagination; if you like the service you should definitely buy the share.

    Consider also that ICICI will now have an enormous amount of capital that it can utilise, to get rid of some of the issues I have a problem with (customer apathy).

  • Siva says:

    >Thanks for ur useful info on mkt,etc. If you write on Sector(cement,auto,etc)-specific, it will be useful

  • Anonymous says:

    >Hi Deepak

    Would value your opinion on buying ABB now or post the date of split … the split like for BHEL has made the price rise.

    What is your overall opinion on ABB and L&T ?

    Thanks , Nidhi

  • Deepak Shenoy says:

    >Nidhi: Splits don’t have the Bonus stripping facility so it may not increase like BHEL did. The price will come down to the 900 levels which can be good for liquidity, but may not impact price so much.

    Overall, ABB is priced at 53 P/E – do you think it’s worth that much? It’s done quite well though, and on technical charts it looks strong (MACD is just turning bullish, RSI is reasonably high)I think I would wait for post-split to buy.

    I like L&T and hold it, and will buy more if there is a retraction below 1900.

  • Anonymous says:

    >I have a small investment in RPL and seeing the spurt in RPL now do you think I should exit at 20 % profit or stay for long term …

    I was actually contemplating building a oil protfolio with ONGC , MRPL , RPL and IPCL for a 3 year term .

    What would be your opinion

    Cheers , Anirudh

  • Deepak Shenoy says:

    >RPL has some interest now that the annual report has been mailed to shareholders. I should do a full report on it but it seems to have a lot of interest. It’s not even started operations, and perhaps you should wait till it does before you sell – why sell something unless a fundamental has changed?

  • Anonymous says:

    >Hi Deepak

    Appreciated your view on BHEL and invested in the same … planning to keep accumulating as and when possible.

    Now seeing BEML FPO , what would your opinion be on this ?

    Regards, Aneesh