Public issue market seen buoyant in '06

Riding the booming secondary market, public offers in 2005 grossed over Rs 22,700 crore. The buoyancy in primary market is expected to spill over to 2006, led by offerings from high profile names such as Reliance Infocomm, Air-India, Kingfisher Airlines, and a host of banks looking to shore up their capital adequacy ratios to meet Basel II norms.

There are possibilities of the government reviving its divestment programme in 2006, according to some analysts, as the government plans to collect roughly Rs 5,000 crore through the process.

According to Prime Database, which tracks public issues, investors pumped in Rs 22,754 crore through 72 public offerings in 2005, compared with Rs 30,511 crore in just 34 offerings in 2004.

However, last year, divestment programmes accounted for Rs 16,819 crore or nearly 55 per cent of the total amount raised through the primary market.

According to Prime Database's managing director Prithvi Haldea, "The mobilisation in 2005 could have been much larger but for the PSU divestments that continued to be in the pipeline but never matured."

Follow on public offerings (FPOs) by listed companies continued to dominate. Compared with nine such issues in the previous year, raising Rs 17,389 crore or 57 per cent of the total amount, 19 listed companies made FPOs in 2005, raising Rs 12,764 crore or 56 per cent of the total amount. The remaining 53 issues were IPOs, which collectively mobilised Rs 9,990 crore.

All public offers in 2005 were subscribed many times over. ICICI Bank's Rs 5,000 crore follow on offer-the largest issue of the year-was over subscribed seven times.

Punjab National Bank's Rs 3,120 crore issue-the second largest issue-was over subscribed 15 times. Among fresh issues, Jet Airways' Rs 1,900 crore issue-the biggest IPO of the year-was over subscribed 16 times.

"The kind of returns earned in previous issues coupled with rising secondary market and attractive pricing has been drawing investors to the primary markets again," said Arun Gopalan, assistant vice-president, mutual fund investments & distribution at Emkay Share and Stock Brokers.

Significantly, small size issues continued on their path to extinction. There were only two issues of below Rs 10 crore as against five seen last year.

Theoretically speaking, if an individual had invested in all the public issues in 2005 and managed to sell them at the highest price, he would have earned an average return of 115 per cent per stock. Issues such as FCS Software with 516 per cent, Saksoft Ltd (488 per cent), Nandan Exim, Gateway Distripark (319 per cent) gave maximum returns.

Although one cannot exit at the right time, every time, the above numbers reinforce the long-term nature of equity investing. The listing price of some of the issues was 70 per cent higher than the issue price. On an average, the listing price was 21 per cent higher than the issue price.

"The stock's performance after its listing also depends on the strength of the hands holding it, therefore issues where mutual funds or foreign funds participated more, did well," said Gopalan of Emkay Share and Stock Brokers.

Still, four companies listed at a discount to their public issue prices.

Allsec Technologies listed at 22 per cent discount, while Alps Industries, Jindal Poly Films listed at 8 per cent and 4 per cent discount, respectively.

Among all investor segments, high net worth individuals this year seem to have not gained substantially due to rising markets and their need to rotate the money.

"High net worth individuals could not make significant gains compared with their cost of money because of high over-subscription and hitting 'sell' soon after the listing to rotate their money into secondary market," said Kamalesh Gandhi, executive director of Centrum Capital.

With large number of public issues attracting huge over subscription in the current bull run reduced allotments to investors, thus affecting absolute returns.

During the current bull run, valuations of listed companies improved on the back of good corporate earnings and liquidity chasing the stocks, making it easier for issues to benchmark themselves against higher peer group valuations.

"Pricing of issues this year was biased in favour of the issuers due to success of issues in 2004 as well as booming secondary market," Gandhi said.

"However, acceptance has been good as purpose of most of them was capex plans or likely acquisitions," he said, citing reasons for success of these issues.

Following the rise in secondary market, pricing power also improved this year. It was easy for them to form optimism as investors were expected to be less sensitive.

Shares of Shri Ramrupai Balaji Steel, which now trade below its offer price of Rs 22, was priced at over 10 times earnings when Nifty components such as Tata Steel and Steel Authority of India were priced at single-digit price-earning multiples.

Other stocks currently trading below their offer price are Nectar Life Sciences, HT Media, Uniply Industries and Bannari Amman Spining Mills.

Shares of HT Media listed at Rs 685 with almost 23 per cent listing gain but plunged below issue price of Rs 530 in just three trading sessions, when the broad market was gaining.

Although the Sensex moved to an all-time high level, the drop in HT Media suggested it was overpriced at Rs 530.

Follow-on issues of IVRCL Infrastructures & Projects and ICICI Bank worth Rs 1,126 crore and Rs 5,000 crore, respectively, were offered at a discount to the ruling secondary market price then, which reassured investors' returns from primary market.

In an attempt to bring more transparency to the primary issue market, the Securities and Exchange Board of India amended guidelines relating to allotment process in book-built initial public offerings.

Qualified institutional bidders will now have to pay 10 per cent margin when applying for IPOs. Also, 5 per cent of the issue size has been reserved for domestic mutual funds.