Lost lustre makes IPOs difficult in future

With the calendar year 2010 coming to a close, the dice appears to be loaded against new-issue investors as key concerns like management quality and issue price still remains to be a big challenge. Investors are naturally worried as they have lost money in 37 out of the 62 initial public offerings (IPOs) of shares that hit the market this calendar year.

Secondly, the recent scam of bribe-for-loans involving a few listed companies, banks and NBFCs have further undermined sentiment.  As such, IPOs of some medium and small-sized companies saw investor interest fade soon after their listing, as investors opted for profit booking partly due to concerns of quality and pricing of the offers.

“Essentially, investors now put money in IPOs for listing gains and they do so mostly in case of such offers which they feel are not priced fully,” said Almondz Global Securities’ head of investment banking Sharad Rathi. 

Although the recent public offerings like Coal India did extremely well in terms of overwhelming response to the issue and in maintaining its price premium even after the issue, 60 per cent of the IPOs which have hit the market this financial year have dropped below their issue price. Figures will tell: only 14 IPOs out of the 37 that have hit the market in the current fiscal have rewarded investors with positive returns, while 12 IPOs have closed with a negative gain on the day of listing debut at bourses.

IPOs that earned positive returns in the current fiscal include Jubilant FoodWorks, Midfield Inds, Aqua Logistics, Talwalkars Better Value, ARSS Infra, Cox & Kings, Godrej Props and Coal India, among others. Investment bankers admit that many of the issues were overpriced, as the promoters were confident of finding buyers in a bullish market. “Most of the current year’s issues were very finely priced and did not leave much on the table for investors,” said Bajaj Capital Group CEO Anil Chopra.

Overpriced issues

The market tends to discover the fair value of the stock post-listing and the price falls resulting in erosion of listing gains, he said while pointing out that DB Realty and SKS Microfinance are the two instances where stocks have been hit worst by the negative news flows involving the companies.

Analysts view that while the fundamentals were not good enough to sustain high prices, the issue of corporate governance was another worry in a majority of the cases. For instance, the corporate governance in the case of Claris Lifesciences had been highlighted as the biggest worry and was one of the reasons that the IPO was graded three on the scale of five.

Then there is much publicised case of SKS Microfinance whose price crashed after its CEO was fired by the management soon after the highly successful IPO. At issue price of Rs 985, SKS Micro was oversubscribed 14 times, but the stock now quotes at 653.

In contrast, the government-owned companies are doing better. As the recent IPO of public sector company MOIL (formerly Manganese Ore India) witnessed an overwhelming response in subscription to the extent of 56.43 times. Out of this, retail investors bid for 37.15 crore shares against the 1.15 crore shares on offer. In fact, MOIL is the third consecutive PSU issuance that has received more than 10 lakh retail applications.

Earlier Coal India’s Rs 15,000-crore IPO (largest in the country so far) got 17.5 lakh retail applications and Power Grid’s Rs 7,500-crore follow-on public offering (FPO) got 15 lakh applications.  No wonder the government is confident to garner well over Rs 40,000 crore, its fund raising target from sale of PSU shares in the current financial year.

Among the poor performers Aster Silicates led the pack of the top losers, with the stock currently quoting at a 71 per cent discount to the offer price. This was followed by Tirupati Inks, Emmbi Polyarns, DB Realty, Tarapur Transformers and Cantabil Retail, among a few notable examples. Indosolar, Orient Green, Microsec Financial and Prestige Estates are few others whose stocks are quoting at a substantial discount to their respective offer prices, after foreign funds sold holdings on their listing.

Negative impact

Despite bullish sentiment aided by a comfortable liquidity situation,  good issues made money for investors but the low-quality issues – also wanting to cash in on the bullish sentiment – topped the negative list of destroying the wealth of investors.  The recent scams in the micro finance sector and in relty sector lending only spiked investor enthusiasm to such an extent that realty and financial services stocks took a hit so badly that several corporates have had to revise their capital raising plans. And speculation is rife in banking circles that a PSU bank which was working on sale of shares to institutional investors has to defer its plans till the sentiment improves.

The worst hit are realty developers, many of whom had lined up IPOs. The list included Emaar MGF, which had deferred its issue earlier, Embassy Projects and Lavasa Corp that has got a showcause notice from the environment ministry recently. Raheja Universal, BPTP, Ambience, Lodha Developers and Kumar Universal were some of the other developers who were also planning share sales.

The inability of developers to tap the stock market could affect them severely as banks are expected to tighten flow of loans to this sector after the ‘bribe-for-loan’ scandal broke out.  “The current controversy has adversely affected investor sentiment for certain sectors and until things settle down, investors are likely to be cautious,” says Deutsche Bank’s Pratik Gupta. Even prior to the scandal, RBI had tightened norms for lending to the realty sector fearing that a bubble was building up. “Some cash flow problems for realtors in the short term given that IPOs are tough and banks are tightening lending norms,” said a top official at Central Bank of India.

Analysts and market experts think that there is money to be made if investors’ concerns on quality and pricing are met as one of them said, “Investors are willing to pay premium for a company which is having a good corporate governance record.”  At the same time, investor worry was very much in evidence through out the second week of December in the secondary market, except for a sharp pull on the last day of the week, as the previous five sessions saw key indices Sensex and Nifty closing below their psychological levels of 20,000 and 6,000 respectively. 

 The BSE Sensex lost 458.04 points or 2.29 per cent to close at 19,509 points, while the S&P CNX Nifty at NSE lost 135.45 points or 2.26 per cent to settle at 5,857 points during the week ended December 10, 2010. During the week long period starting December 3 to December 10, some of the recently listed IPOs took heavy battering with barely few scrips managed to stay afloat — closing little over the issue price — but a lot more of them saw their scrip fell by almost one-third of their issue price.