After a long lull, the primary market has become attractive and several high-profile issues including those from PSUs have entered the market. High net worth individuals (HNIs) have invested heavily on the hope issues will list at a premium but the premia have crashed. Rajesh Bhayani discussed the primary market scenario and changing equations in the IPO market with Enam Group Chairman Vallabh Bhanshali. Excerpts:
Is the worst over in the markets?
Financial markets the world over are going through unusual times. The economies are recovering but there are divergent views on the strength of the recovery; there is no shortage of liquidity today but people fear interest rates could rise any time since rising liquidity is putting pressure on inflation. The nature of rally is not clear as there cannot be growth without inflation in most parts of the world. There are pockets like India where money is coming. It is market which is out-performing other markets; no one wants to be left behind by not participating in the rally.
IPOs are not doing well after listing. Does this suggest the valuations are not correct?
Valuation is a constant exercise. In the past, we have seen IPOs giving returns of 20-40 per cent on listing. But as the market is institutionalising, not getting big returns on listing is possible. In the case of book-building, especially in large issues, markets tend to price the share more efficiently. This is not a new trend, and was observed as early as the end of 2007.
Does book-building make the issue costly for investors?
I don’t think investors pay a price that they don’t want to pay. Institutional investors invest money with a long term view. Sometimes, private equity investors don’t allow promoters to sell IPOs below a certain price. Sometimes, there is no follow-up demand on the day of listing or stags come for concerted selling on listing. So don’t assume a trend by just looking at a few IPOs. I also don’t think issuers charge a price which doesn’t allow investors to make money.
Are the days of huge listing gains over?
Not at all. Investors will generally, make more money where the themes are new. Relatively new themes also come with follow-up demand. Financial services, and within that insurance companies and micro-finance companies will generate interest as and when they come. There is also demand in the infrastructure space — there can be offerings from windmill companies, road building companies and so on.
Will bunching of IPOs impact the secondary market?
I don’t think so.
Should firms planning to enter the market pare down their price expectations?
What we have seen recently is also a case of pared down price expectations. Adani Power’s promoters invested at Rs 112 even as they priced the shares in IPO at Rs 100. In fact, primary floats are generally at some discount as the company is new, its trading pattern is not known and keeping the price at a discount shows the companies are investor-friendly. Many QIPs have also shown this trend. Unitech and DLF have raised money through QIPs at significantly lower prices. LIC Housing Finance’s QIP was also very popular with investors and traded up significantly after the deal.
What is the IPO outlook over the coming months?
Not too many big issues are likely in the near future — the government divestments aren’t expected in the very near future. What we have seen now is typical half-year-end syndrome.
Markets are also trying to find their feet — while the undercurrents are positive, they are struggling to find the right levels. Most issuers want to come in but they are not fully convinced about the market and therefore the spurt and ebb in issues is seen.
And this applies to QIPs as well?
QIP is a product devised to take care of difficulties faced in preferential allotments. It is a quick process to raise money — the investors are few and the regulations is relatively lighter. It is a good instrument for institutional investors as they can get higher allocation.
The recently-introduced anchor investor concept should be a win win for both issuers as well as investors?
That is again one more good innovation though with a lock-in. Those investors who cannot invest because of a lock-in will have to come through the public issue route, but others will qualify as anchor investors. They will get higher allocations. Of course, their payment terms are different from other institutional investors, but in the long run such things make no difference.
Isn’t allowing anchor investors really the beginning of the process of asking institutional investors to make full payment on application itself?
I think these are some of the technical factors that do not alter fundamentals in the long run. Liquidity, financing, payment terms are all technical factors. They create timing differences or differences in financing cost. Long term prospects don’t get affected by these factors. Take for example, F&O stocks which are more liquid but this matters only in the short term. Having stock in the F&O segment per se does not make it attractive in a fundamental way. Ultimately there should be liquidity in the stock and it remains popular irrespective of it being in the F&O segment.
We have seen in the past that reforms make markets healthy and it has always proved good in long term. Improving various market mechanisms has ensured the market has grown bigger and better —that is the lesson from the past.
What is the outlook for secondary market in the near future?
Secondary market valuations are not cheap now. For retail investors, this is time to be careful. The average investors should invest when they think the market is cheap.
