IPO market sees sector debuts

Consumption-driven sectors dominate line, with telecom, IT and health care also featuring; partly a result of years of PE investment backing

This article has been modified. Please see the clarification at the end.

The spate of initial public offerings (IPOs) of equity that have hit the market or are ready to do so over the next one year will see some virgin sectors marking their debut on the bourses.

After the IPOs of Wonderla Holidays and Syngene International, both from first-time sectors, Coffee Day Enterprises, Matrix Telecommunications and Prabhat Dairy are expected to soon launch theirs'. These first-time sectors belong to the consumer goods, telecommunications and information technology (IT) infrastructure spaces.

“Since the consumption story is what is expected to drive the economic growth, the consumer sector is where we are seeing traction at this point in time. B2C (business-to-consumer) business model having scalability and decent operating margins & ratios could evince interest from the investors,” said Gaurav Saravgi, senior VP-ECM, Centrum Capital.
 
One of the most anticipated IPOs in the consumer space is that of Coffee Day Enterprises, parent company of the Cafe Coffee Day (CCD), the retail cafe chain, which will raise Rs 1,150 crore. Started in 1996, CCD has 1,472 outlets in India at the end of 2014 and abroad. Private equity (PE) entities KKR, Stanchart PE and New Silk Route are its institutional investors. It also reportedly sold stake to investors like Infosys co-founder Nandan Nilekani and ace investor Rakesh Jhunjhunwala's Rare Enterprises and Ramesh Damani.



Matrix is a telecom service provider for Indians travelling abroad. Prabhat Dairy does not belong to a new sector but the earlier occasion a company from the sector had listed on a bourse was in 2000. Among those already listed, Wonderla Holidays operates theme parks and Syngene International is the outsourced research arm of Biocon. Wonderla raised Rs 180 crore and Syngene's IPO got Rs 550 crore.

Niche companies in the information technology and health care sectors are also seeking listing opportunities, said experts.



Investment bankers say 10-15 years of PE investment has come to fruition, leading to a flurry of companies looking to hit the markets. PE backing played an important role in opportunities to companies which would have otherwise found it difficult to raise capital.

“The structure of companies has changed since 2003-04, which is when the PEs started entering Indian markets. With the advent of new business, sector options are also going up. Most of these companies which come under new sectors have a good track record, have been in existence for some time and have grown to a comfortable size, giving their PE investors a good opportunity to exit via an IPO,” said Dara J Kalyaniwala, vice-president of investment banking at Prabhudas Lilladher.



Health care, IT and infrastructure companies have seen a large number of IPOs, as bank credit became expensive in the past few years. Even as interest rates trend downwards, the large proportion of bad loans means companies would continue exploring IPO to raise funds. In such a scenario, experts said these new companies are fresh air for investors. With the economy still struggling, most infrastructure-related companies which have listed in the past five or six years are finding it difficult to get good returns to their investors, they said.

“Even if businesses fundamentals are sound, investors remain wary of such companies, given the macro economic scenario. So, when a company with a fresh business idea comes in, investors are naturally interested, as that could mean better returns,” said a senior official with a domestic investment banking entity, in talks with a company in IT infrastructure management and looking to list.

Further, institutional investor interest has been higher this time, with mutual funds also backing many IPOs as anchor investors. For instance, HDFC Infrastructure Fund bought about a third of the total anchor investor portion in Wonderla Holidays' IPO. Sundaram Mutual, IDFC MF and SBI MF have been some of others to have participated in IPOs over the past year.

This encourages retail (individual) participation, said experts. “Retail is always guided by institutional investors. In most IPOs over the past year, the retail category has been coming in on the last day, after observing institutional participation in the first two days. In IPOs where institutional participation has been tremendous, we have seen good retail participation, better than what it was before,” said Kalyaniwala referring to the Syngene International offer which closed last week and saw the retail portion getting subscribed by about five times the amount on offer.

CLARIFICATION
An earlier version of this article had made mistakes in the number of Coffee Day outlets, and in the names of some of the investors in the company. The errors are regretted.