IPOs not too bright; other routes open up

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IPOs not too bright; other routes open up

This article was posted on Sep 6, 2009 and is filed under Stock Views

With the revival in the secondary market, primary markets have started witnessing some action too. While, investors have shown interest in
initial public offerings (IPOs), expensive pricing may have a negative impact on the IPOs in pipeline.

The activity in the primary market is dependent on the performance of the secondary market. After a lull of a few months, the secondary markets have started witnessing some action as the equity markets have rallied North for a few months. The major equity index, the Nifty gained as much as 80% since March 9, the day when the rally started.

An appreciation of around 33% from the current level will bring the Nifty back to its levels during early January 2008. Bulls of Dalal Street remained charged for the last six months. This has improved the overall market sentiments and the risk appetite of investors to some extent.

With this started the activities in the IPO market. After a lull of a year or so, a few large IPOs made their debut. However, these could not leave a great impression on listing. Adani Power and National Hydroelectric Power Corporation (NHPC) listed with a listing gain of merely 5% and 8%. Both the IPOs lost during the day of listing.

In fact, NHPC closed almost at its issue price. Experts blame it on their high pricing. According to D K Aggarwal, MD of SMC Wealth Management Services, the primary reason for lacklustre listing is the expensive pricing of the issue. However, the point to ponder is the fact that there is ample liquidity in the market.

Adani Power had an issue size of Rs 3,000 cr but it was oversubscribed by more than 20 times. Similarly, the issue size of NHPC was around Rs 6,000 cr but it received bids worth more than Rs 140 k cr and subscribed by more than 24 times. This shows that there is sufficient amount of money in the market lying for even bigger issues but the pricing has to be attractive. “At the end of the day both short and long-term investors do want to have some gains in their kitty,” said Aggarwal.

Aggressive pricing and the poor listing may affect the IPOs in the pipeline. According to a recent study by Thomson Reuters, Indian companies would raise a whopping Rs 77.5K cr through IPO route during the second half of the current year. This is almost four times the fund raised during 2008 through IPOs. Also, according to the study the number of IPOs is going to see an increase of around 20%.

In fact, there are several IPOs, which had the Sebi approval but could not see the light of day because of bad market condition. More than a dozen companies filed drafts with Sebi for seeking approval for IPOs during 2009. Of this, only one issue has hit the market so far. The issue of Oil India is going to open on September 7. The company plans to raise around Rs 2,500 to 2,700 cr.

According to a financial distributor who did not wish to be identified, poor listing may affect the IPOs in the pipeline. Since investors are not getting decent listing gain, short-term players may avoid putting money in the IPOs.

Some experts are of the opinion that poor listing may not have an impact on the IPOs in pipeline but definitely on the leverage application — investing by borrowing money. According to Nilesh Shah, deputy MD at ICICI Prudential Asset Management Company, poor listing will influence the leveraged application as many speculators have suffered losses. This will put pressure on the investment bankers to price the IPOs fairly with some upside left for the investors.

Nevertheless, since the IPO route was not working out and there is still a lot of uncertainty, corporates have been finding different routes to raise funds. According to Shah, we have seen limited innovation in the market in terms of raising of resources. Plain equity and debt offering has been the order of the day. Recent issuance of warrants by a large housing finance company was a welcome change.

Meanwhile, non-convertible debentures (NCDs) became the talk of the town. According to Aggarwal, NCDs seem like a much more attractive option for investors since these debt instruments provide them higher rates than bank deposits.

The volatility of the equity markets has also driven investors to this low risk investment. NCDs also offer higher interest rates relative to convertible debentures, and one’s capital amount is secure. Since the economy is currently riding on the lower end of the interest rate cycle, NCDs offer a better alternative for raising funds too.

Corporates are primarily raising funds from domestic primary markets through debt papers, a majority of which consists of NCDs. The amount rose by 46.7% for the fiscal ended March 31, 2009 as against the corresponding period last year to $13.95 billion, according to the CMIE database.

In addition, qualified institutional placement was also one of the routes that companies raised funds. According to another study done recently by Thomson Reuters, around Rs 40 K cr would be raised though QIP route in this year. An equity broker who did not want to be identified, said, “Corporates are raising funds through QIP and we expect this route to continue. Also, ADR routes are actively explored. There are a few companies looking for listing in the US OTC market as well.”

source: Economictimes

Tags: buy or not IPO, expert view on IPO, IPO allotment status