Illustration: Ajay Mohanty
The weak listing of state-owned Hindustan Aeronautics (HAL) and tepid demand for the Rs 10-billion initial public offering (IPO) of mid-segment hotel company Lemon Tree Hotels capped a disappointing quarter for primary market investors.
Shares of the aerospace company closed 7 per cent below its IPO price, while Lemon Tree’s offering scarped with barely any subscription from retail and high net worth investors (HNIs).
HAL joins five other stocks, listed in the January-March period, whose shares are currently trading below or near their issue price. The average returns for the nine IPOs listed in this quarter are a paltry 2 per cent.
Not surprising then, most investors are giving a miss to the maiden offers. Of the 12 offerings that have been launched since the start of the year, seven barely managed to get a full subscription in the retail segment — meant for investors investing up to Rs 200,000. These include big-ticket offers such as ICICI Securities and HAL.
The disappointing quarter follows a blockbuster 2017 when 37 companies
mopped up a record Rs 745 billion from the domestic IPO market.
According to market players, lofty valuations and weakness in the underlying market have affected primary issuances.
“A record-breaking year and ample liquidity have given issuers and bankers the confidence. Most of the issues that have come now have been pegged to last year’s high valuations. However, as the markets have corrected, investors are questioning high valuations,” a head of research at a foreign brokerage said.
The benchmark Sensex and the Nifty have dropped as much as 10 per cent from their record highs reached at the end of January. The broader markets have declined even more. The correction has seen valuations of the Sensex and mid- and small-cap indices come off from their record high multiples.
Market players said investors were averse because of the correction. A case in point was the Rs 40-billion public offer of ICICI Securities, the country’s largest brokerage, which was subscribed only 78 per cent even though it had entered the market with 20 per cent lower valuations than earlier envisaged. The company had priced its issue at 35 times its estimated earnings for 2017-18.
On expensive IPO valuations, Ajay Tyagi, chairman, Sebi, said, “IPO pricing is an issue. If companies
are pricing it high and they are failing, nothing much Sebi can do about it. This year (FY18) has been a mega year for IPOs.”
Some offers, including that of Bandhan Bank and Amber Enterprises, have managed to buck the weak listing trend this year. Shares of both the companies
are currently trading 25 per cent above the IPO price.
“Investors are more interested in growth stories. They are willing to pay a high price for companies that have unique business models and potential for high growth. It was clearly seen in the case of Bandhan Bank. The issue did well even though it quoted a price nearly eight times its pre-IPO book value,” said an investment banker.
According to experts, for the IPO momentum to sustain this year investors would need to see more success stories like Bandhan Bank.
“Last year was a record one for IPOs. This year also looks promising. However, the secondary market needs to be more stable. Also, valuation needs to be more reasonable. The message from investors is clear that they will not blindly invest in any IPO just because the momentum is good,” said the broking official quoted above.