Volatility fuels IPO price debate

Merchant bankers advise issuers to price offerings at fair value to evoke better response.

The heightened volatility in stock markets is likely to impact the pricing of initial public offers (IPOs). Leading merchant bankers say that primary offerings will have to be priced "far more attractively" to get good response in the light of the weak sentiment in the secondary markets.

"In a bullish market, there are enough takers for an issue even if it is priced at a minimal discount to peers in the secondary market. However, when the markets are weak, issues will have to be priced at 15-20 per cent discount to make it attractive for investors," said Sanjay Sharma, senior vice-president, head -equity origination and capital markets, DSP Merrill Lynch.

Primary issues are usually priced with an intention to leave some "money on the table" when the company gets listed.

But of late, the issues have been able to attract huge subscriptions despite coming either at marginal discount or on par with the valuations of comparable listed companies.

This is because during bullish times, investors are willing to give credit for the future prospects of a company while in bearish times investors are more worried about the downside and hence less inclined to count on the future, Sharma said.

Issuers as well as lead managers are hoping that the recent decline in stock prices triggered by foreign fund selling would subside and markets will stabilise soon.

"As the volatility subsidies and market stabilises, primary issues will have be aligned to the new levels in the secondary markets," said Ramesh Srinivasan, executive director, Kotak Mahindra Capital Co., adding that it may not be advisable to launch an IPO at present given the current flux.

"Like there is off-season in Indian marriages, this seems to be an inauspicious time to launch new public offer," he said.

S Subramanium of Enam Financial Consultants says only good quality issues would be able to hit the market given the prevailing conditions. Issue pricing would also have to take into consideration the market volatility and secondary markets prices.

Despite the uncertainties, merchant bankers said that it was business as usual as of now.

Apart from the DLF issue, which is expected to the biggest ever IPO in the country, some high profile public offers for which red herring prospectuses are already filed with Sebi include the Hyderabad-based GMR Infrastructure Private and real estate company Parasvanath.