Tough Going For The IPO Market

IPOs have always flooded a bullish market as promoters want to cash in on the positive sentiments that prevail in the market at such a time. This is quite true as we have seen a flurry of IPOs in 2007-08. But the scenario has changed drastically after the markets fell in 2008. At present the urge of raising money through the IPO is the last sort after route by promoters.

Inspite, of the fact that IPOs are receiving a muted response from the market there are promoters who have tried to woo investors through this route. With geate amount of confidence in their business model and better financial performances, these promoters have tried to tap the market to raise funds. But investors have taken it with a pinch of salt and companies seeking entry in the market failed to make it from the road shows to the listing ceremony. In the last one year, out of the 27 IPOs that got listed, 17 are trading below their issue price which is nearly 63 per cent of the total number and this is quite alarming.

Out of the five IPOs that have hit the market so far in CY2012, barring MT Educare most others are trading well below their issue price. In fact MCX India, which was touted to be a massive wealth creator, is trading nearly 4% below its issue price. Moreover the recent failure of Samvardhana Motherson’s IPO despite its leadership advantage in the automotive ancillary industry could also be a spoilsport in the market’s willingness to acknowledge such high valuations. This has proved true as the company which was to raise Rs 1665 crore has withdrawn its IPO citing muted response from the market.

Well, companies may feel low about the response they have received, but this is indeed good in one sense. Previously, there are instances where during the IPO listing, prices were rigged to the benefit of a handful of punters. Also there are other instances where taking advantage of the market sentiments the IPOs were priced at a high premium and they have succeeded in that too. But with the passage of time as markets corrected valuations of those companies witnessed a severe beating and the stocks are trading well below their listing prices. Long term investors in these stocks are left with nothing as the price appreciation in this kind of markets looks blurred.

SEBI needs to be given due credit for having acted on a proactive basis to address to investors concerns and for having increased the transparency of the IPO process manifold. The proactiveness has made sure that the benefit from the IPOs does not go only to a handful of punters. Rather, each and every investor should be gaining from it. Now, the BRLMs are also taking a keen interest on the valuations and are not pricing issues higher knowing that investors may dump the IPO at any point of time. Dalal Street Investment Journal has indeed addressed these issues and the example of that is the avoid rating on Plastene India which has withdrawn its IPO citing a muted response. At present it is a clear indication to all the companies that if they have to raise money via the IPO route they must be transparent and the valuations should be taken due care of. Otherwise, investors who have become more informed may dump them at any point of time.