IPO pricing in focus; small investors grumble

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IPO pricing in focus; small investors grumble

This article was posted on Sep 26, 2009 and is filed under Press Releases

Mumbai: Jayesh Jhaveri has had enough of Indian IPOs for now.
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Like many individual investors, the retired Mumbai businessman has seen his shares in NHPC’s $1.25 billion IPO fall below their offer price. Jhaveri, 69, figures he’s better off buying already listed stocks in a market that has risen 74 per cent this year.

Special: Initial Public Offerings

“Why should I put my money in these IPOs, when the prices fall below the issue price on the listing day itself and are still around there?,” says Jhaveri. “One would rather buy the active stocks in the secondary market.”

Retail investors, who are allotted 30 per cent of Indian IPOs, have shown less enthusiasm than institutions in recent listings, which bankers said may compel issuers to price their offerings more attractively and force investors to lower expectations.

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“There will be more sanity and you will see hopefully more sensible pricing taking place,” said Atul Mehra, managing director of investment bank JM Financial.

Indian companies have raised roughly $15 billion through share sales this year, surpassing the total for all of 2008, and billions of dollars worth of IPOs are in the pipeline.

Companies readying listings include Reliance Infratel, JSW Energy, Indiabulls Real Estate, Great Eastern Energy, and Oberoi Constructions.

Retail investors turn IPO-shy

“The bad listing makes the investor exit the stock to cut losses and pressurises it more,” said Rajen Shah, chief investment officer at retail brokerage Angel Broking.

“One or two such bad experiences scares him away from other IPOs. It’s almost a cycle, until some company leaves enough room for listing gains while pricing it,” Shah added.

State-run power company NHPC saw its much-anticipated IPO subscribed by more than 23 times, but the portion set aside for individual investors was covered less than 4 times.

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NHPC shares gained more than 10 per cent in their Sept. 1 trading debut, but have mostly traded below their offer price.

Adani Power’s $630 million IPO was subscribed around 18 times, with the retail portion subscribed nearly 3 times. Its shares gained almost 8 per cent on their first trading day, but are currently around their IPO price.

With that recent experience in mind, many individual investors shunned Oil India’s $570 million offering, which was subscribed more than 30 times, but just 1.8 times in the retail portion. The stock debuts on Wednesday.

Adani, NHPC and Oil India all priced their offerings at the top of their indicated ranges.

“Companies have not really left anything on the table for the investors,” said Ambareesh Baliga, vice president of Karvy Stock Broking.

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Conservative pricing

Some investors are still smarting from last year’s much-hyped $3 billion Reliance Power IPO. The issue was covered around 70 times, with the retail portion oversubscribed 13.6 times, but the stock has never traded above its IPO price.

“Most of the companies planning IPOs are becoming slightly more conservative in their pricing after the after-market performance of a couple of recent IPOs,” said Rashesh Shah, CEO of investment bank Edelweiss Capital.

He said retail appetite for new listings will remain given high levels of savings, but said heavy oversubscription levels and big first-day trading pops of the sort seen during boom times were unlikely – a development he said was healthy.

“We’ll not see a crazy pop, and maybe a 5-10 per cent pop is what we in the industry consider good,” he said. “Five or 10 per cent will keep the flippers away.”

Retail demand for the wave of IPOs by Chinese companies also appears to be increasingly selective.

In July, building materials maker BBMG Corp saw the retail portion of its IPO more than 100 times subscribed and its shares jumped 65 per cent on their debut.

But this week, Metallurgical Corp of China fell 13 per cent on its Hong Kong debut after the firm raised $2.3 billion, and real estate firm Glorious Property opted on Friday to price its IPO towards the lower end of its range.

Several retail investors in India said they would rather invest in already listed companies than have their money locked up for around 20 days in IPO applications.