IPO roulette

 

The booming IPO market which has given stellar returns this year could prove even more lucrative for the retail investor. Sebi has allowed companies to issues shares to retail investors with a discount of up to 10 per cent on the issue price. For investors who have been sitting on smart gains on the back of a rising market, this move will only increase their appetite for primary paper.

Of the 85 issues listed till date in 2007, 64 ended in positive territory on day one while 54 have managed that even on current market price. While this might not seem such a major achievement with the Sensex closing in on the 20K mark, a volatile period marked by the credit crisis meltdown is not the easiest to pilot an IPO.

Unlike its performance last year when it returned 47 per cent, the Sensex has managed 38 per cent so far in 2007. The difference is largely because the benchmark index was down 9 per cent in February and 3 per cent in November.

The lower returns of the secondary market have also cast a shadow on the returns from new issues. Of the 46 and 77 IPOs that have hit the market in 2006 and 2005, nearly 80 per cent are trading above their issue price. However, this year about 62 per cent are trading above their IPO price.

"The premium on these stocks," believes Srinivasan Subramanian, head - investment banking, Enam Securities, "is a combination of bullish market conditions and the quality of issues." Given the gains on listing, and the huge appetite for primary market paper, are merchant bankers getting the pricing aspects wrong?

Low cut-offs

Merchant bankers don't think so. Says Atul Mehra, Co-CEO and MD, JM Financial Consultants and head - capital markets, "IPOs are not underpriced, the key factor driving the significant returns post-listing is the overwhelming demand for good quality paper. There is an excess of financial resources chasing fewer value-added opportunities."

Lead managers and analysts say that there is pressure at the pre-IPO marketing stage to see the listing through. Companies prefer to leave something on the table for investor rather that face the prospect of under-subscriptions. Says Prithvi Haldea, managing director of Prime Database, "A failed issue is not only expensive but is also a reflection of the reputation of the company, especially with the participation of large number of institutions."

Excess subscriptions, then, are the norm and this is largely due to the presence of qualified institutional buyers, which have at least 50 per cent of the issue reserved for them. With oversubscription comes the bane of grey markets, where issues start trading before the IPO allotment takes place. With oversubscriptions in the order of 100 times and large allocations to institutional investors, the retail investor seems to be the loser.

Missing out

While not less than 35 per cent of an issue is reserved for retail investors, high oversubscriptions mean that most investors either do not get any shares or receive tiny allotments. One alternative is the increase in the proportion of shares allotted to retail investors.

Says Haldea, "About 60 per cent of the issue should be reserved for the retail investor. A 25 per cent share of the IPO is enough for qualified institutional buyers (QIBs)." The other option, believes Subramanian, is to allow companies the flexibility to fix the cap on the size of retail participation.

The 50 per cent quota for QIBs, analysts say, has been fixed by the regulator as this acts as a safety barrier for the retail investor who does not know enough about these companies. Unlike retail investors QIBs are able to seek and get detailed information about the company they are investing in.

Retail investors too, seemed to have caught the trend and QIB oversubscription acts as an important barometer for investment. Says Haldea, "The retail investor is smart. It is noticed that investor participation is high in issues where QIB participation is high." However, should investors only depend on the institutional exposure to a stock before committing funds or are their other mechanisms that will help them grade a stock?

Rating stocks

While rating institutions have introduced a grading mechanism to help investors segregate good stocks from bad, its effectiveness is still to be proven. Says Arun Panicker, senior director, research, Crisil, "It is going to take some time before ratings are accepted. It will happen when valuations are linked with the process of grading that reviews management quality, financial strength, sector dynamics and corporate governance."

The conventional belief is that ratings are useful in judging debt instruments but are not suited to measure the risk elements of equities. However, some analysts opine that the sudden stock market corrections and volatility will force the investor to be more careful about investing in IPOs.

Says Mehra, "In the prevalent euphoric times, investors are overlooking the importance of ratings. But this will soon become a crucial criterion for decision-making and would help them make more informed decisions."

While investors are better served by going through the brief recommendations of a rating agency instead of poring through a lengthy prospectus, as of now they are ignoring the advice. Says Haldea, "Ratings have absolutely no use. Investors have voted with their feet for issues that are rated at 1 or 2 out of 5 and all these are trading at a premium." While a majority of the listings are trading above issue price what were the favourite sectors of investors this year?    IPO KINGS Name Industry Issue Size Rs Crore Issue Price CMP %  chg Subscription(x) HNI Retail QIB Total DLF Construction housing/others 9187.50 525.00 943.90 79.79 0.84 0.85 4.93 3.30 Power Grid Corpor Power 2984.45 52.00 147.90 184.42 39.28 6.55 115.47 64.50 Idea Cellular Telecommunication 2125.00 75.00 122.40 63.20 21.90 3.66 78.59 49.56 Mundra Port Miscellaneous 1771.00 440.00 923.00 109.77 153.95 15.87 159.95 115.00 HDIL Construction housing/others 1485.00 500.00 821.25 64.25 1.33 1.24 8.57 5.58 Power Finance Finance (term lending inst) 997.19 85.00 243.55 186.53 48.18 8.21 137.14 77.16 Puravankara Construction housing/others 858.70 400.00 402.90 0.72 0.53 0.50 2.87 1.92 Central Bank Banks 816.00 102.00 135.40 32.75 0.81 15.20 89.01 61.49 IVR Prime  Construction housing/others 778.25 550.00 391.90 -28.75 1.05 1.32 8.36 5.49 Omaxe Construction housing/others 551.69 310.00 434.80 40.26 71.64 12.14 86.69 62.00 Spice Comm. Telecommunication 520.31 46.00 48.50 5.43 18.09 3.83 58.60 37.57 Fortis Escorts Pharmaceuticals 494.14 108.00 79.85 -26.06 1.06 2.94 2.97 2.79 Firstsource  Information technology 443.52 64.00 65.55 2.42 40.06 11.04 71.18 49.32 Akruti Nirman Construction housing/others 361.80 540.00 1149.35 112.84 63.63 12.02 118.28 80.88 House of Pearl Textiles readymade apparel 329.17 550.00 235.85 -57.12 0.18 1.03 6.67 3.67 Maytas Infra Constructions - Civil turnkey 327.45 370.00 891.70 141.00 48.46 15.02 96.64 67.33 Motilal Oswal Fin Securities/commod trading serv 246.07 825.00 1718.95 108.36 9.04 4.18 43.78 27.18 Mindtree  Information technology 237.72 425.00 417.50 -1.76 126.93 28.55 157.37 102.75 Advanta India Miscellaneous 216.32 640.00 1041.00 62.66 0.05 0.17 5.66 3.45 Empee Distilleries Miscellaneous 192.00 400.00 291.70 -27.08 1.30 5.48 8.75 6.54 Consolidated Cons Engineering 188.70 510.00 963.75 88.97 57.87 12.28 118.78 80.79 Binani Cement Cement 153.75 75.00 121.55 62.07 0.28 1.41 1.33 1.25 Take Solutions Information technology 153.30 730.00 1062.70 45.58 82.87 22.12 75.14 57.57 Redington India  Information technology 149.51 113.00 410.45 263.23 41.12 11.40 59.65 43.46 Koutons Retail  Retailing 146.26 415.00 726.75 75.12 16.39 14.22 66.38 45.10 Religare Ent Financial Services  140.16 185.00 506.45 173.76 209.21 89.14 185.09 159.40 Cinemax India Entertainment 138.26 155.00 130.40 -15.87 42.19 15.22 60.62 41.86 KPR Mill Textiles readymade apparel 133.02 225.00 157.50 -30.00 2.06 0.03 1.44 1.17 Zylog System Information technology 126.00 350.00 317.45 -9.30 137.86 33.84 0.00 75.52 C & C Const Constructions - Civil trunkey 124.24 291.00 209.55 -27.99 3.76 4.54 29.98 19.73 Time Technoplast Plastics 123.53 315.00 730.40 131.87 68.79 12.50 69.83 49.14 Dhanus Tech. Information technology 113.13 295.00 276.05 -6.42 24.04 14.54 13.96 28.29 Vishal Retail Retailing 110.00 270.00 695.25 157.50 316.47 58.03 54.15 76.12 Global Broadcast Entertainment 105.00 250.00 923.85 269.54 159.25 45.72 37.64 49.75 Broadcast Initiatives Entertainment 102.60 120.00 47.65 -60.29 3.23 2.68 1.48 2.36 Data Complied by  BSRB

A mixed bag

Real estate as an investment theme has been a hit with investors and the sector accounted for 33 per cent of money raised so far this year. Of the Rs 13,000 crore raised from seven issues, nearly Rs 10,000 crore was accounted for by one big issue–DLF. While India's biggest real estate player was oversubscribed three times, oversubscriptions were highest in the case of Akruti Nirman at 88 times.

The oversubscriptions were not on account of retail segment (12 times), but were driven by high net worth individuals (63x) and QIBs (118x). The story is similar for issues across the realty and construction space.

As on date, Orbit Corporation has delivered the best returns to investors across sectors multiplying their money by five times. However, the stock was listed 18 per cent below its issue price. With the exception of IVR Prime which has given negative returns of 30 per cent, all other realty stocks are trading in positive territory.

Textile, apparel manufacturers and garment retailers raised about Rs 1,300 crore. The retailers–-Koutons and Vishal Retail—got the highest subscriptions while the largest issue in this space was House of Pearl Fashion which raised Rs 329 crore. In line with the fortunes of fabric makers, a majority of the companies have given negative returns. The retail players have generated returns above 70 per cent.

Eleven IT companies raised Rs 1,700 crore with the largest issue being that of Mindtree Consulting which mopped up Rs 240 crore. Though the sector is going through a bad patch only three listed IT companies this year–Mindtree, Zylog and Dhanus Technologies–are trading below issue price. Mic Electronics, Everonn Systems and Allied Computers have given investors returns of over 200 per cent.

Financial services companies—Motilal Oswal, Religare Enterprises and ICRA—raised about Rs 500 crore from the markets. Religare's issue was oversubscribed 159 times–the highest for all listed companies this year. Whereas broking outfits have doubled investors' money, ICRA has given returns in excess of 50 per cent.

While the IPO market has been a successful hunting ground for investors, what can they expect in 2008?

IPOs in 2008

Investors can look forward to more construction, energy and PSU listings. In addition to a pipeline of real estate and infrastructure companies, issues in excess of Rs 1,000 crore are likely to come from Reliance Power and PSU majors–National Hydroelectric Power Corporation, Oil India and Rural Electrification Corporation.

The trend of high QIB participation, especially FIIs, is likely to continue as these institutions have raised over $2 billion in India-specific funds in October. Funded high net worth investor participation, which has taken off in a big way due to listing gains that are higher than interest costs is also likely to continue.

Merchant bankers say that issues will continue to attract oversubscription in the near future as well. So for retail investors, getting allotment is likely to remain as elusive.