The few issuers that braved the primary market so far in 2012 seem to have given a fairer deal to investors.

Sometimes, a bear market can accomplish what years of regulatory effort can’t. Just consider the changes in the primary market over the last one year.

For much of the past decade, putting money in initial public offers (IPOs) has been a mug’s game for most Indian investors. Companies and their promoters have tended to leave as little money on the table as possible for prospective investors.

The timing of most offers to bull markets also makes sure that this ‘premium’ is extracted over already steep market valuations, on the assumption that investors will flock to them no matter what.

Investors do, and when the tide turns, they often find that companies cannot deliver to those sky-high expectations. Stock prices then tank, leaving investors with measly pickings.

Fairer pricing

But that seems to have changed, if only temporarily, in the past one year. Very few issuers have braved the primary market so far in 2012. But those that did, seem to have given a fairer deal than usual to their investors.

An analysis of the eight offers that were listed on the main exchanges — NSE and BSE — showed that they sport an average absolute return of 75 per cent today. All these IPOs have also fared better than the market.

The offers of 2012 have come from diverse sectors, some not exactly fancied by the markets. VKS Projects and National Building Construction Corp jostled for funds right alongside jeweller Tribhovandas Bhimji Zaveri and restaurant chain Speciality Restaurants. But they have all managed reasonable returns over offer price. One factor that has helped returns in many of these offers (though not all of them) is pricing.

IPOs made in the first half of this year did not enjoy the luxuries of a bull market. With companies anxious to make sure that they did raise the required funds, offer prices were kept at reasonable levels, in most cases.

TBZ and National Building Construction were content with price-earnings multiple of 10-12 times.

Even issuers such as MCX and Speciality Restaurants avoided the temptation to charge the usual ‘scarcity premium’, and priced their offers below peer group valuations. That has allowed them room for appreciation as the markets rallied.

There’s a lesson in this for investors — if you want to bet on a company making an IPO, which is essentially an unknown quantity, do so when the stock markets are down and out.

Weeding out

One cannot however, completely ignore the zealous efforts of the market regulator in cleaning up the primary markets. The equally depressed market conditions of 2011, instead of keeping away fly-by-night operators, actually proved to be a breeding ground for them.

The latter part of 2011 saw a slew of IPOs with dubious fundamentals not just manage fancy subscription numbers but also make a splendid debut, their stock prices soaring on listing. The Securities and Exchange Board of India’s subsequent investigations revealed not just siphoning off of IPO proceeds to group entities, but also collusion between investment bankers and issuers to ‘showcase’ superlative offer response and even wholly fictitious operations.

SEBI’s quick action in publicly naming and barring the offenders from market activities has no doubt made doubtful issuers think twice about approaching the public markets. The requirement that merchant bankers display the track record of the past issues lead managed by them has also come into force. The call auction mechanism on listing day has curbed wild swings on listing.

The filtering out of smaller issuers, and allowing them to list on a separate SME platform, where minimum ticket sizes are higher, also seems to have helped.

While the offers listed on the main exchanges in 2012 have delivered good returns, those listed on the SME platform have been less consistent.

No euphoria, please

But now, with secondary markets looking up and issuers again beginning to queue up to make IPOs, investors would do well not to get carried away with new issues.

You may have missed out on the 30 per cent market rally so far this year. Maybe you didn’t buy into any of the 2012 IPOs which have delivered splendid returns.

But that is no reason to make outsized bets on the offers that are now queuing up for your attention in the primary markets.

After all, with market valuations still at reasonable levels, there are plenty of beaten down stocks in the secondary markets.

Bid for the offer only if you find that the pricing is reasonable in relation to peers. Valuations should be the only guide-post in selecting between offers.

Aarati.k@thehindu.co.in

(This article was published on December 8, 2012)
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