Will IPO Markets Revive In 2014?

Recently, a news item that made it to the front page of many financial news dailies in India was about Indian film superstar Amitabh Bachchan garnering 161 per cent gains from Justdial’s Initial Public Offering. His investment of Rs 3.83 crore on the first day of listing has become Rs 10 crore now. Those who think that Bachchan’s superstar’s status brought this news onto the front page are not quite on the mark. 

In this particular case, the stock was the real hero, while Bachchan’s name was only symbolic. The fabulous returns that Justdial generated even in a dull and tepid primary market was the main reason for this news to move up. For those who are in the markets for the past 10 years, this would have come as a real surprise. In fact, they were witnessing a scenario when every company that tapped the primary market provides astonishing returns and that too in just a few trading sessions.

In a span of four years from 2004-2007, IPOs sold like hot cakes. During this period, India Inc. raised more than Rs 77000 crore from the primary markets through IPOs. Then, with the kind of setback the equity markets experienced in the wake of the global meltdown in 2008, the craze for IPOs started to decline. However, despite the weak global scenario, the primary markets remained vibrant throughout 2008 and 2009, as 57 companies tapped the markets to raise Rs 36450 crore. In 2010, the IPO market again came into limelight, with 64 companies raising Rs 37534.65 crore.

The joy, however, was short-lived. The scenario changed drastically and companies failed miserably to create wealth for their investors. Soon enough, the IPO market lost its sheen and hit its nadir. In 2013 money raised through IPOs declined to hit a 10- year low.

In 2013, 38 companies raised Rs 1619 crore. Among these, Justdial was the only IPO that caused a flutter among investors. The only other two worth mentioning were Repco Home Finance and V-Mart. Power Grid raised RS 6958 crore, but that was through a Follow-On Public Offer. Had it not been for the 35 small and medium enterprises’ (SME) IPOs that mobilised around Rs 367 crore, the fissures would have been much worse. 

So, what was it that caused the IPO market to remain so downbeat in 2013? More importantly, with some green shoots seen in the secondary markets, will the IPO market revive in 2014? Going ahead in this story, we try to find answers to both these questions. 

KEY VARIABLES IN 2013 

The year gone by was bad not only in terms of a lower amount being garnered overall, but also in terms of the returns it generated. While the BSE Sensex provided returns of nine per cent, the BSE IPO index declined by more than 19 per cent during the said period. What was the reason behind the poor show of India Inc. in the primary markets?

While everyone has been blaming the uncertain situation in the secondary markets (which is also true of course), we feel that the seeds of the poor performance were sown in 2010 and 2011 itself. It was the poor IPO returns in those two years which resulted in investors giving a cold shoulder to the primary market. In 2010, only 10 out of 64 IPOs were trading above the issue price, and in 2011, 10 out of 37 IPOs remained above the issue price. No wonder the fancy for IPOs started fading out. Apart from the uncertain market conditions, higher valuations demanded by the companies acted as a dampener.
[PAGE BREAK]

While these factors were already keeping investors distant from the IPO markets, companies refrained from raising money from the public for about three years in the face of volatile markets and a slowing economy. V G Kannan, MD & CEO, SBI Capital Markets says, “Political uncertainty and continued policy paralysis (both at the political and bureaucratic level) in India. Poor global and domestic macroeconomic factors impacted the confidence of institutional investors in the Indian markets for a major part of 2013, especially poor fiscal health and the high current account deficit, besides a hugely underperforming currency”.

Agrees V Jayasankar, Senior Executive Director & Head of Equity Capital Markets, Kotak Investment Banking, “The key reason behind the slowdown in the primary market was the overall slowdown in the economy and the investment cycle getting elongated. In addition, there were issues around reforms which the government started only in the second half. All these factors impacted the primary markets”. 

SEBI’S INADVERTENT ROADBLOCKS 

While the companies were already facing problems, the regulator SEBI unwittingly acted as another hurdle for the companies. Regulations like compulsory grading of IPOs and safety net policy for retail investors served as a roadblock. Though it was for the benefits of the retail investors, these factors kept the issuing companies on the backfoot. 

As mentioned earlier, the start of the SME platform brought some solace to the primary markets. Around 35 public offerings based on a different set of rules (no filing of prospectus, but market-making mandatory and minimum application of Rs 1 lakh) does look like a good performance. But aggregator sites report that only 20 out of the 45 stocks listed on the two national SME bourses are traded, and that too with low volumes. 

But instead of working on reviving investor confidence, the Securities and Exchange Board of India (SEBI) plans to relax entry barriers by scrapping IPO grading, reducing disclosures and doing away with even the formality of making a public offer. This is after the experiment with offering a safety net to investors had met with abysmal failure (in fact, two issues offering a safety net had to pull out of the market). 

Another factor was norm of minimum 25 per cent public holding. As companies had to comply with this norm by the end of the June 2013 quarter, there was a supply overhang in the equity markets. While we think it was a negative for the IPO markets, Jayasankar puts this in an interesting perspective, “If you look at the last five years, the average FII flows would have been in the region of USD 15-20 billion. Roughly 50 per cent of the flows are absorbed by the primary markets. If you look at the last two-three years, we haven’t seen that much of activity in the primary market. Hence, the government FPOs were good in a way that they absorbed huge liquidity that had come from FIIs and ensured that an asset bubble does not get created in the system.”

INSIPID 2013, INSPIRED 2014? 

As for how 2014 would pan out, there is a split view in the markets. While most people are expecting the primary markets to improve, there are few who opine that a recovery is not yet in sight. 

The investment bankers and equity analysts who see a revival in the offing are expecting the primary market to recover this year after a lacklustre 2013. A stable government after the general elections, steady secondary markets and improving corporate earnings growth will give a fillip to money-raising through primary market stock sales by companies, as they are expected to renew their expansion plans. We feel that the post-elections political situation may bring some clarity to the way forward on economic and policy matters, which in turn may give a fillip to the capital markets in general and the primary markets in particular. 

Kannan agrees with this view, “With the revival in the secondary and primary markets, and a need for capital in the mainstream companies, a revival in the IPO markets is on the cards. Primary markets will also benefit from over-leveraged companies accessing the capital markets; such companies would be willing to price their issues attractively given the need for capital”. 
[PAGE BREAK]

With regard to a potential revival, Jayasankar says, “The IPO pipeline is very thin at this point in time across the industry. A lot of issuers are waiting for the uncertainty of the elections to get over. Hopefully, we should see an improvement in market sentiment during the latter part of the year”. 

SEBI’S ACTION PLAN – WILL IT REALLY HELP? 

If we take a look at the number of companies trying to tap the primary markets, as many as Rs 72000 crore worth of IPOs cleared by the SEBI are yet to hit the market or have been called off altogether by the respective company managements. This shows the kind of pipeline that existed for the IPOs. 

Data from Prime Database suggests that over the past five years, 107 IPOs which had received SEBI approval since January 2009 to raise Rs 55330 crore lapsed. In addition, 54 planned issues filed since January 2009 to raise Rs 16032 crore withdrew their offer documents. If these 161 companies had hit the market, Rs 71362 crore more could have been raised, almost the same as the Rs 71602 crore which was raised in the five-year period since 2009. This makes it clear that the rate of companies withdrawing their IPOs is quite high.

To counter this, the SEBI has planned to curb the mandatory grading of IPOs. This may help some companies to tap the markets, but we feel that it is not a good move as the number of disclosures would be lower and does not seem to be in the interest of retail investors.

Rather than making the regulations lax, we are of the opinion that the more important factor is what valuations the shares are provided to retail players at. Investors have already burnt their fingers on this in the past, and hence, a revival may not be seen if there is nothing left in it for them. On the valuations part Kannan says, “We as investment bankers always advise our clients to leave something on the table for investors vis-à-vis the benchmarked valuations at the time of the public issue. In a bull market, companies feel that the need for such a discount should be minimal or even non- existent, thus leading to underperformance when the markets turn sour”.

All factors considered, there are good chances of the primary markets reviving from here on. However, more clarity on this would emerge only after the general elections are over and we see some political stability. Apart from that, FIIs have an important role to play in the primary markets. If the inflows are sustained, the revival will get additional support. Read our cover story in this issue, which details opinions on whether FFI inflows would continue. 

With the economy on a revival path, support from FIIs, SEBI also providing an action plan and political stability expected, we feel that a revival is imminent in the IPO markets. Nevertheless, we advise our readers not to jump indiscriminately at all the offers and invest selectively only in those IPOs that are fairly valued.