India’s equity markets have generally been having a very rough run this year and some of the negatives have splashed over into the IPO (Initial Public Offering) market as well disappointing both the investor and the entrepreneur. And this bleakness is going to affect a lot of companies that have ambitions to raise funds, including the government. To compound things, there is manipulation too. Manik K. Malakar investigates…
“The ongoing turmoil in capital markets is impacting IPO markets severely,” says Amit Chheda, Head Equity, Inventure Growth and Securities. “The secondary markets are not passing through the best of times and the public issues that have hit the markets in recent times have received a very cold response, if any,” says D. K. Aggarwal, CMD, SMC Investments and Advisors. This perhaps, summarises the mood of the primary market.
And this freeze is a global phenomenon too. Though global IPO markets have shown some upward trajectory in Q3 FY12 (Third Quarter FY12) this may not be smooth as global macroeconomic risks such as the sovereign debt crisis could negatively impact market sentiment. From various points of view, that of the investor, the fund raiser as well as those associated with the IPO market the prospects are none too bright.
In a rewrap, according to inputs from RK Global, a Financial Services firm, Indian companies raised Rs. 5978 crores through public issues in the nine months of the current year, a decline of approximately 19% vis-à-vis the corresponding period a year ago. “In terms of the number of issues, however, the first half of FY 12 was similar to the previous fiscal,” said Uday Narayan Dubey, VP Research & Institution Business RK Global.
Thus, 40 public issues were brought out in the January to September period of FY12, as compared to 59 issues in the same period a year ago. “There is a big variation in the number of issues, but the bearish sentiment is forbidding issuers to enter the primary market,” Dubey continued.
He noted that companies that listed recently on stock exchanges had up to three-fourth of their value eroded in less than two months. “Of the five companies that listed on the exchanges since August, three are trading approximately 6 to 75% lower than their offer prices,” Dubey continued. The Sensex has declined approximately by 10% during the period.
So this as well as the domestic turmoil that is affecting the secondary markets, will affect the IPO markets for this quarter at the very least, analysts opine. “The prospects for the IPO market in Q3 FY12 continues to be bleak since the global turmoil; affecting our stock markets; as well as the domestic economic uncertainties refuses to ebb even after sustained government measures, including rate hikes,” said Shanu Goel-Senior Research Analyst-Bonanza Portfolio.
And this bleakness is going to affect a lot of companies that have ambitions to raise funds, including… the government!
The government has indicated that their Rs. 40,000 crore disinvestment target for FY 12 may be put on hold. The government in September put on hold the FPO (Follow-on Public Offer) of gas major ONGC on hold. “The ONGC FPO was eagerly awaited by market participants and its postponement has definitely dampened sentiment,” said Aggarwal.
So, what of the grand plans of the various companies to raise funds from the markets, via IPOs? “We believe that Fortune 500s, like, ONGC and SBI will definitely wait till the market turbulence is over as they will be raising more than Rs. 5000 crores,” said Dubey.
And besides the government, other (private) players too will be hit in their fund raising plans. “Most promoters would like to wait for the market sentiment to improve and then come out with the IPOs at healthy valuations rather than selling out cheap,” said Aggarwal. He opines that if the secondary market remains under pressure then promoters will continue to defer their plans rather than go ahead with their IPOs.
If this far, the IPO market has been down, would it recover soon? “No, as the factors making the markets volatile has not been settled successfully as of now,” said Goel.
One of the reasons for the IPOs putting up a lacklustre performance to date has been the fact that many of the IPOs were stiffly priced and had left very little money on the table for investors. “This has been one of the most important reasons for the disappointing performance of a majority of the IPOs in 2011,” said Aggarwal. “Until and unless we see IPOs coming at reasonable valuations, it seems difficult for this trend to reverse,” he continued.
So for the retail investor would IPOs be something to look at? Market experts are almost unanimous that if the company and price are right then one could look at the offer for investment.
“Investors are adviced to invest in good IPOs which have strong fundamentals and are valued at the right price,” said Amit Chheda of Inventure.
“IPO investment is recommended provided the company and its management has a good track record and the pricing is fair to all,” said D. K. Aggarwal of SMC Investments and Advisors. However, if either of these conditions are not met, then he feels that the secondary market offers far better opportunities, than the IPO market.
“Our recommendation would be the value proposition that the company brings to the table. If we foresee strong earning scenario in the times ahead and also see that the stock stands a chance of appreciation because of strong fundamentals, we would certainly give a “go”” said Uday Narayan Dubey of RK Global.