Aavas Financiers to Garden Reach, volatility spike takes a toll on IPOs

Aavas's Rs 17.3-bn IPO fails to garner full subscription a day after PSU firm Garden Reach extends closing date

The volatility in the secondary market has spilled over to the primary market, with initial public offerings (IPOs) failing to garner desired subscription. On Thursday, the Rs 17.3-billion offering by Rajasthan-based housing finance company Aavas Financiers failed to garner 100 per cent subscription. A day earlier, state-owned Garden Reach Shipbuilders had to cut its issue price and extend the closing day as it managed to reach only two-third subscription mark.

Experts say risk aversion among investors following a sharp drop in stock prices is taking a toll on new issuances. Several IPOs waiting in the wings to come to the market will have to be deferred till the market stabilises and investor sentiment improves, they added.

Benchmark indices have corrected six per cent the past one month, while the broader market and financial stocks have seen a sharper cut.

Unlike Garden Reach, Aavas Financiers’ IPO managed to sail through as it crossed the mandatory 90 per cent subscription mark, thanks to strong demand from institutional investors. The so-called qualified institutional buyer (QIB) portion of the IPO was subscribed nearly three times, even as retail and high net worth individual categories saw demand for only a quarter of shares on offer. Overall, the issue was subscribed 97 per cent.

Investment bankers said the company will have to prune the offer for sale (OFS) component due to the demand shortfall. Aavas Financiers’ IPO comprised of fresh equity issuance of Rs 4 billion and an OFS worth Rs 13.3 billion by private equity investors including Lake District, Partners Group and Kedaara Capital.

“After the Aavas IPO was launched, sentiment towards NBFCs (non-banking financial companies), particularly housing finance companies, took a drastic turn. It was a huge challenge ensuring that this issue goes through. We had some comfort as the IPO had seen good institutional investor interest at the time of the roadshow,” said an investment banker handling the IPO. “It is no doubt a challenge launching a new transaction at the moment.”

Aavas’ focus on underserved rural and semi-urban markets, high growth and strong risk management framework was a big draw for investors, said analysts.

While Aavas managed to scrape through, Garden Reach faces an uphill task as institutional investors haven’t been big subscribers of IPOs public sector undertakings (PSU) in the past one year.

The shipbuilding and engineering firm’s Rs 3.4-billion IPO so far has garnered just 72 per cent subscription. The QIB portion of the IPO has been oversubscribed but still not enough to make up for the shortfall in the retail and HNI categories as was the case in Aavas.

As in the past, insurance giant Life Insurance Corporation (LIC) might have to bail out the issue if it fails to garner subscription, said market observers.

Garden Reach’s IPO, which was to close on Wednesday, will now remain open till Monday. Also, the lower end of the price band has been cut to Rs 114 per share from Rs 115 earlier.

“The fund raising could be hit severely if secondary market momentum continues to remain weak. It is bad for the overall markets but more so for the government which has back-ended its disinvestment programme for this fiscal,” said another banker asking not to be named.

The centre has set a steep disinvestment target of Rs 800 billion for 2018-19. In the first six months, the centre has managed to mop up less than Rs 100 billion.