Return of the IPO rush

The rush for initial public offerings (IPOs) is back and it is almost an ‘action-replay’ of the late 2007 to early 2008 period.  Retail interest in IPOs has picked up again with some recent issues getting many times over-subscribed and sold in advance in the grey market at a premium. And the very emergence of grey market where shares are sold in private deals even before the IPO is launched, is a sure sign of bullish market expectations by investors that shares will outperform the IPO issue price when they get listed.

The recent data of CARE Research and Sebi showcases the revival of the IPO market,  with as many as 39 IPOs making a debut, raising total funds to the tune of about Rs 24,696 crore in 2009-10 while at the same time the buoyancy continuing in the present fiscal as 14 IPOs hit the market in April-July 2010, raising a total fund of Rs 12,115 crore.
 
A study put out by the CARE Research recently expects the IPO pipeline to remain robust on two counts. One, the centre has chalked out an aggressive disinvestment plan to raise up to Rs 40,000 crore by fiscal 2011 and its recent criteria envisages that all listed and profitable PSUs should have a minimum public holding of 10 per cent and all unlisted profitable PSUs should be listed while retaining a minimum 51 per cent stake and management control with the government, which would make as many as 60 PSUs suitable for disinvestment. 

Secondly, the volume of draft offer documents filed with Sebi has seen a substantial recovery in 2010-11.  Although the number is not as high as in 2006-08 period, the broad trend signifies a healthy pipeline of IPOs.  The new exubarence to IPOs also indicate that the people have quickly forgotten some of the big misses in the IPOs launched in 2007 and 2008. That was the time when retail investors got first hand experience about the burst of the IPO bubble due to overpricing done by investment bankers and company promoters.

A year later, in August 2009, the state-owned National Hydroelectric Power Corporation (NHPC) IPO raised close to Rs 6,038 crore issuing shares at Rs 36 per share when the BSE  Sensex was at 15,000 level and now when the Sensex has moved upwards of 20,000, the PSU scrip is still hovering at Rs 32 per share, much below its issue price (down 11 per cent).

Why this rush?
When the share prices keep rising in the market, it reflects a gush of liquidity into the system propelled by positive market sentiment. That is when the promoters waiting on the sidelines take the plunge to raise funds for their business expansion plans through the IPO route.  The trend always is that when the secondary market is bullish, even smaller firms sail through the IPO process without any hiccups for much higher valuations. 

“A lot of smaller deals are happening now because it may be harder for them to jostle alongside biggies like Coal India which is to hit the market on October 18”, says Vantage Corporate Services Director Rajesh Dedhia. 

It is in fact safe to say, there is a rush for IPOs now and instances of good response to them have induced higher participation from the retail segment.  For instance, the response to Coal India IPO road shows has been so overwhelming that Dharmesh Jain of Enam Securities says: “It’s a game changer for sure for India rather than only for the IPO market because this can bring a lot of retail investors back to the markets which were so far shying away.”

Recent listings of IPOs also have been good. Only four IPOs came out in July-2010, while three in August-2010, yet all the listings like Prakash Steelag, Bajaj Corp and Midfield Industries have provided positive returns to the investors. In September, 11 IPOs opened, of which, with the exception of two issues — Indosolar and Microsec Financials — most have provided positive returns. 

In all, the IPO boom this time ranging from January to September-end 2010 led to 53 companies raising Rs 41,500 crore as compared to Rs 19,550 crore collected by 21 companies in all of 2009, says the market tracker Prime Database. 

However, in terms of listing gains, 11 firms listed below their offer price, while another 17 companies did not show any gains after listing.

Government’s plan
Meanwhile, the government has plans to raise $8.6 billion through stake sale in the current fiscal, which is a part of its composite plan to sell stakes in over 60 PSUs in the next few years. Hindustan Copper, perhaps, is next on the list of PSU IPO debuts in the market, while ONGC, SAIL on the FPO (follow on public offer) or rights issue front. So much so, Sebi data suggesting about 45 companies, both PSU and private sector, had filed IPO papers with the market regulator in the last three months also exemplifies momentum in the liquidity driven market. 

The other reason for IPO rush is the sheer robust state of the stock market itself. “Liquidity is strong at the moment and stocks are looking up; this is one of the reasons why a lot of companies are ready to hit the markets now,” says Kotak Investment Banking COO S Ramesh.

Even as the BSE Sensex has shed 194.78 points or 0.95 per cent for the week ended October 8, 2010, to settle at 20,250.26 points, after witnessing a correction in the previous week, the foreign funds (FIIs) continue to aggressively mop up Indian stocks leading to net equity inflows in 2010, now standing at a record $21.42 billion, above last year’s $17.45 billion, as per the latest Sebi data. This includes FII inflow through both the primary and secondary market route.

On the present IPO rush Head of Equity at SMC Capital Jagannadham Thunuguntla has a different take when he says: “Nobody is confident of the market, so now when there is liquidity many issuers want to take advantage of this window of opportunity.”   

Liquidity crunch
Yet, a section of the market is concerned that a strong equity issuance (of IPOs and FPOs) pipeline ranging from the likes of Coal India, ONGC, Hindustan Copper and SAIL to mention a few over the next six months would soak liquidity from the secondary equity markets. Thunuguntla of SMC Capital allays such fears saying the turnaround of IPOs is now only 12 days and investors do get refunded quickly, so as such there may not be much of a liquidity problem.

More than the liquidity aspect, it is the valuation factor that matters, says HDFC’s Parekh, adding: “…..The only thing about the IPO market is that valuations have to be more realistic than what we have seen in the past.”  Needless to say, valuations in India have been significantly higher in the recent past and participation by retail investors in IPOs is limited because of that. 

Though the IPO market currently sees lot of action, merchant bankers say that there is no danger of crowding out or bunching up of issues.

“They are all small issues and liquidity will not get sucked out due to the number of issues.  Also, the total amount raised by all these issues is rather small,” says Apurva Shah at Deutsche Equities India.

Not an easy choice
No doubt, IPOs do help in ferreting out values hitherto hidden from the public scrutiny but there is no easy way to pick the right ones from the rest. 

Even if you sift through the bulky offer documents not much wisdom could be gained as they are not the only source of information on the companies and also the pricing of IPO through book-built process is a tricky thing and is within the ambit of investment bankers, whose role especially in pricing the offers stiffly was so awful that even the Sebi Chairman Chandrakant Bhave recently criticised them at a public forum.  At times, some IPOs also adds to investment risk as they are planned to provide the exit route for private equity (PE) players. So they are timed and priced for a comfortable way out for them (PE investors) only.  Buying IPOs purely for a listing gain is again risky and doesn’t always pay. 

Take a look at Reliance Power and Future Capital IPOs, both sheer disasters on listing gains, while Cox & Kings, Mahindra Hospitality and Jubilant Foodworks emerged outright winners with impressive returns on the listing day and in terms of medium and long terms also.

CARE Research has studied the price performance of about 116 IPOs issued between August-2007 to August-2010 period and the analysis revealed that about 35 per cent IPOs are currently trading higher than the upper IPO price band, while 62 per cent are traded below their IPO price, which effectively means that you would have made losses in three out of five IPOs had you invested in the offers in the said period.  In short, there is no one way (and which is right) to pick out IPOs that may yield good listing gains before hand. 

Assuming that if the investment period is extended even beyond the listing, it doesn’t make IPOs any better, as the answer lies in the pricing of IPOs. All the same, the study by CARE Research pointed out that the extent of mispricing is somewhat abated in IPOs issued in 2009 and 2010, with majority of IPOs outperforming their initial pricing. 
However, it says, the price performance of newly listed IPOs remains to be seen over the next two to three years, as the current (out)performance may be an offshoot of the ongoing buoyancy in the liquidity driven bull run market.