The low-key investor response to big-ticket initial public offers (IPOs) of Paytm
and Star Health and Allied Insurance offers interesting insights into the investment psyche of market participants. While one was the front-runner of India’s digital payment landscape during demonetisation, the other had the backing of ace investor Rakesh Jhunjhunwala. Yet, both these maiden public offers with subscription levels are nothing to write home about.
Paytm’s IPO was subscribed 1.89 times and Star Health’s offer was subscribed 79 per cent. In comparison, initial share sales of other companies, launched during the same period, garnered far more investor interest.
So, why didn’t investors subscribe to these mega issues? For one, pricing and expensive valuation for both these companies kept investors away from these IPOs, say analysts.
"Paytm's IPO was huge in size at Rs 18,300 crores and unfortunately it coincided with a period, when the broader market was going through a correction. Huge size of IPOs
required an extremely good response from institutional investors and HNIs, who held back a bit back because of general market conditions, global uncertainties around the tapering by Fed and expected rate hikes by central banks around the world," points out Mohit Ralhan, managing partner and chief investment officer at TIW Private Equity.
Star Health, he says, had a pricing issue. "It's a traditional business with larger players already listed and a direct valuation comparison was possible. Star Health asked for a market cap-to-net premium earned multiple of 10.3 times, which was at a premium of all other already listed insurance companies," he adds.
For Sameer Kaul, managing director and chief executive officer of TrustPlutus Wealth, investor response to these IPOs
underline the fact that investors are weary of investing in companies wherein they do not understand the business model.
"In some of the recent IPOs, where the size has been relatively large, the supply has matched or exceeded the demand, thus resulting in low to average subscriptions. Another important factor that investors seem to be considering is the proportion of ‘Offer for Sale’ in the overall IPO proceeds. Issues with large OFS portions seem to be receiving a relatively tepid response," he says.
Third, analysts believe investors are playing safe and are betting only on profitable stories.
"Not all the IPOs
are struggling to generate subscriptions. The retail portion of Nykaa IPO subscribed 12X, while Tega Industries, GoColour and Tarsons Products IPO subscribed 29X, 50X and 11X, respectively. So we don’t believe that the investment psyche has changed for retail investors, rather, they are playing safe," says Vinit Bolinjkar, Head of Research at Ventura Securities.
ALSO READ: First 'Buy' report on Paytm sees firm turning profitable by 2026
Analysts believe companies planning to raise funds must price the issue well, and clearly define the business’ growth outlook and model.
"The size, timing and pricing of an IPO are critical factors. While timing may not be under control of the company or the bankers but they should keep the size and pricing reasonable and attractive. India’s IPO story is just starting, and the future looks bright," says Ralhan of TIW PE.
Yesha Shah, Head- Equity Research at Samco Securities adds that while steeply priced IPOs may still not discourage institutional investors, the promoters should realise that retail investors do not have as deep pockets and a high-risk appetite.
"Further, retail investors may not have an extremely long-term investment horizon. Thus, even though a company can be an attractive long-term portfolio candidate, a frothy pricing may make the IPO difficult to sail through. The valuation should ideally not completely price in every growth driver but should leave some upside on the table for the investors to enjoy," she says.
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