IPOs Losing Steam

There may be a lot of interest in the IPO market, but prices cannot hold in the secondary market Kumar Gautam After a scary period for the stockmarket in 2008 and the first half of 2009, promoters seem to be regaining confidence and are willing to come back to raising money through initial public offers (IPOs). In just one day, on 30 September 2009, eight companies filed their draft offer documents with the Securities and Exchange Board of India (Sebi). It was the same the next day. Together, this was more than the total number of companies that approached Sebi during the entire January-August 2009 period. Anecdotal evidence also points towards a change in promoter outlook. Says Chetan Majithia, head of equity at rating agency Crisil that also grades IPOs: "We are seeing traction in the IPO market. Due to the changing environment, companies, especially from power and real estate sectors, have started enquiring about IPO grading." This is just the promoters’ side of the story. Are investors accepting? Contrary signals The subscription figures for recent IPOs indicate that investors are excited about every issue that hits the market. Adani Power, the first Rs 1,000 crore-plus IPO in 2009, was oversubscribed around 21 times. The next big issue was from the public sector unit (PSU) NHPC, which was oversubscribed 23 times. Oil India, the second PSU IPO this year, attracted even higher public interest and was oversubscribed 31 times. However, signals from the secondary market are totally different. Early interest generated by most of these companies soon fizzled out—shares of half of the companies that came out with IPOs this year are now trading below their issue prices in the secondary market. The much-hyped NHPC stock, for example, is trading 9 per cent below its issue price. This indicates the market’s current belief that the NHPC stock was overvalued at the issue price. *** Slow to take off Only half of the companies that came with their IPOs in 2009 have given positive returns and then too most have underperformed the market Company Issue Price (Rs) Current Price (Rs) Return (%) Edserv Softsystems 60.00 183.00 205.00 Jindal Cotex 75.00 87.00 16.00 Mahindra Holidays & Resorts India 300.00 343.00 14.33 Oil India 1,050.00 1,193.00 13.62 Adani Power 100.00 102.00 2.50 Pipavav Shipyard 58.00 56.25 -3.02 NHPC 36.00 32.90 -8.61 Excel Infoways 85.00 69.50 -18.24 Globus Spirtis 100.00 80.20 -19.80 Raj Oil Mills 120.00 74.00 -38.33 Current price and return are as on 12 Oct 2009 *** Except Mahindra Holidays and Resorts India and Oil India, none of the newly listed large companies have been successful enough to substantially lift investor sentiment in the secondary market, even when the overall market, as indicated by the Sensex, has more than doubled in value. What lies ahead? In spite of giving low returns on listing and later in the secondary market, IPOs have continued to attract significant investor interest. As we go to press, Indiabulls Power, promoted by Indiabulls Real Estate, is in the market to raise around Rs 1,600 crore. By the end of the day the issue opened, it was oversubscribed 5.95 times. Other prominent companies such as JSW Energy, Reliance Infra Tel and Emaar MGF Land are also in the IPO pipeline. What should you do? Most of the companies planning to bring IPOs are in the infrastructure and construction space. The common assumption underlying the investment argument for these IPOs is that the demand for infrastructure is exceeding supply. Although this opens an opportunity for companies in the long term, the short- and medium-term earning visibility of these companies also has to be looked into. Based on this, Indiabulls Power is not an attractive investment. Says Rupesh Sankhe, power sector analyst at Angel Broking: "Although the outlook for the power sector is good, the short-to-medium term earning visibility for Indiabulls Power is non-existent." Instead, you may, therefore, look at listed companies that have operational track records and are trading at relatively cheaper valuations.

BSNL hopes to hear from govt on IPO soon

BSNL, India’s fourth-largest mobile operator, had last invited bids for equipment to build 93 million GSM lines, which attracted interests from global majors including Ericsson.

Indian telecoms firm Bharat Sanchar Nigam Ltd hopes to hear soon from the federal government on its initial public offer plans and will appoint merchant bankers, chairman Kuldeep Goyal said on Tuesday.

The government had last year mooted proposals to list the state-owned firm, which was expected raise $10 billion to be the country’s largest-ever IPO. But the offering was put off amid opposition from communist parties and the firm’s employees.
Goyal said Sweden’s Ericsson, had technically qualified for supplying GSM equipment in the northern and eastern parts of the country, while China’s Huawei had qualified for the southern region.

BSNL will negotiate pricing with the two companies, he said.
BSNL, India’s fourth-largest mobile operator, had last invited bids for equipment to build 93 million GSM lines, which attracted interests from global majors including Ericsson.

Upcoming IPOs

1. Mahindra Holidays
2. Oil India
3. NHPC
4. Pipavav Shipyard
5. Astec Lifescineces
6. C Mahendra Exports
7. ARSS Infrastructure Projects
8. Gini & Jony
9. Globus Spirits
10. Raj Oil Mills
11. Chiripal Industries
12. Euro Multivision
13. Infinite Computer Solutions
14. Excel Infoways
15. Usher Eco Power
16. Midvalley Entertainment
17. Godrej Properties
18. Radiant Info Systems
19. Adani Power
20. Jindal Cotex

Investors get relief as IPO stocks rise 100%

Shares of companies that did their IPOs in 2008 crashed badly after the equity markets tanked towards the second half of that year. But there is some good news for IPO investors who stuck on, as most IPO stocks have risen close to 100% from their bottoms in October, recouping a part of the investments.

However, a third of the stocks are less than 50% of their offer price, an analysis of 38 IPO stocks show.

Around 11 IPO stocks including Chemcel Bio-Tech , KNR Constructions, Aishwarya Telecom, Sita Shree Food Products, Manjushree Extrusions, Somi Conveyor Beltings, Kiri Dyes, Niral Cement, Birla Cotsyn, Onmobile Global have as on date delivered more than 100% returns from their October 2008 lows.

Around 10 more IPO stocks such as Future Capital, Sejal Glass, Resurgere Mines, J Kumar Infraprojects, KSK Energy and 20 Microns etc. have returned close to 100% gains in the same period.

However, even after such a stupendous rally, IPO stocks such as Chemcel, KNR Constructions, Sita Shree Food, Manjushree Extrusions, Somi Conveyor Beltings and Birla Cotsyn are nearly half way from their IPO offer prices. Others like Future Capital, Sejal Glass, Resurgere Mines, 20 Microns and Cords Cable Industries are also in the same club.

The improved sentiment in the stock markets and the new government in place could help some stocks to recover as analysts increasingly become bullish over India’s prospects.

“Shifting political winds now give a well-balanced Indian economy a real chance to emerge as Asia’s biggest surprise in the years immediately ahead,” Stephen Roach, Morgan Stanley Asia said.

Is it safe to invest in IPO

When a company first comes to the market in its initial public offering, it can generate a great deal of interest from investors, making it an attractive time to invest, but in general, the question of whether it is safe to invest in a company at IPO will depend on the perception of its market value.

Typically, the IPO is the only time at which the share value of a business is fixed. A business has to go through a number of steps prior to IPO to establish its long term security, and the launch price of the stock will be determined by economists and accountants in order to strike the best balance between the amount of money the business needs to raise, and its actual value, which relates to its assets and profit forecasts.

Because the market does not set the price of an IPO, it is a price that is subject to enormous fluctuations as soon as the shares go on sale. Depending on whether investors decide that a company is worth putting their money into or not will determine the direction that the share price takes over the first few periods of trading.

If a business is seen as a good risk, then the share price will rise above the IPO valuation as investors are drawn in, while if it is seen as being overpriced, then the value will fall as the stockholders are forced to lower their prices in order to sell their stock.

It can be difficult to gauge whether a business will rise or fall in value at its IPO, although there are a number of indicators in the period running up to the date that can give you an excellent insight into whether or not to get in early.

In the case of large businesses, their IPO will be a high profile event, which will inevitably attract a large number of institutional fund managers as well as smaller private investors to put their money into the business, and prices will tend to follow an upward trend in the first few sessions as the market value is adjusted to meet the interests of the market forces.

The performance of smaller companies at IPO is much more difficult to predict. If they are seen as being a well run and profitable business in a growth area such as telecommunications or technology, then they will generally rise in value for the first few sessions, in which case it is essential to get in early in order to get the best price and take advantage of the initial rises, whereas, a business that is seen as being in a static industry with long term potential, but short term difficulties, it is advisable to wait for the price to fall before putting your money in to avoid the initial drop in value.

On the whole, provided you are able to adopt a flexible and fluid approach to investment, and can put money in at a time that suits you, as well as having the ability to get out at the right time, investing in an IPO need not be a high risk move, and can offer significant rewards, however, this requires the ability to see beyond the marketing and recognise potential for growth and losses, as well as doing the research to back up your decision making process.

Emerging market companies grab lions' share of global IPO pie

Emerging market companies cornered a major chunk of the global IPOs as they accounted for 15 of the 20 largest issues in the year 2008, which include the stock sale of Reliance Power as the single Indian offering.

As per the global IPO report of consultancy major Ernst & Young, "In 2008, the emerging markets were the source of 15 of the 20 largest IPOs worldwide including four each from China and Saudi Arabia."

Despite significant decline in IPO volumes, emerging markets were responsible for the growth in the primary market segment. "In 2008, the BRIC countries together hosted 163 deals worth USD 28 billion, a 62 per cent drop in deal numbers and a 76 per cent decline in funds raised from 2007," Ernst & Young said.

Of the top five IPOs four are from emerging market economies like Brazil, China, India and Soudi Arabia, while the biggest was one from the United States.

The largest IPO of the year, and the biggest ever in US history, was the USD 19.7 billion Visa IPO on the NYSE, which represented 21 per cent of total capital raised globally.

The second largest IPO was the USD 5.7 billion offering of China Railway Construction and the third largest was Brazil's USD 4.1 billion IPO of oil and gas company OGX, Ernst & Young added.

The fourth in the list was India's Reliance Power, which had raised Rs 11,560 crore in the largest IPO on the Indian capital market.

"India's energy company Reliance Power was the fourth largest IPO, raising USD 3.0 billion on the Bombay Stock Exchange, but now trades far below its offer price," the report said.

Emerging market companies, particularly in oil and commodities, launched seven out of 10 largest IPOs including one from the Czech Republic, two each from Russia and Poland.

Meanwhile, due to market turmoil the global IPO activity in 2008 fell by 61 per cent in deal numbers and 67 per cent in funds raised.

The United States has raised the maximum capital through the IPO route, while, China launched the maximum number of IPOs, and Saudi Arabia was the host country for four of the world's top 20 initial public offerings.

A sector wise analysis shows that the financial, energy and power and materials sectors raised the most IPO capital while real estate, healthcare and technology IPOs declined 90 per cent on an average.

"In 2008, the global financial crisis led worldwide IPO activity to plummet by more than half. Investor appetite and companies' willingness to list were severely undermined by tumbles in market indices," the report said.