Markets

Sky-high valuations point to bubble brewing in IPO market

Palak Shah Mumbai | Updated on January 09, 2018 Published on November 15, 2017

Signs of froth: DMart valued higher than Walmart; insurers listing at P/E of over 65

Is it a case of deja vu for India’s initial public offer (IPO) market? Similar to what had happened in 2007 and 2008, a bubble may be brewing for most IPOs that hit the markets this year too.

Though no price-to-earnings (P/E) comparison is available with other companies as they are the first to list among their peers, the high valuation in most of the public offerings has caught the market regulator’s attention.

Music Broadcast, Avenue Supermarts (DMart), Shankara Building Products, CL Educate, S Chand & Co., Tejas Network, AU Small Finance Bank, Matrimoney.com, Pratap Snacks all have a P/E between 50 and 200, much higher than their peers or the sector. These companies are also not in the derivative segment, limiting any swift price correction.

Market experts believe that what’s driving this rally in IPOs soon after listing are not fundamentals, but a feeling among investors of being left out. Margin funding by non-banking finance companies (NBFCs), which allows huge leverage and grey market operations, is the other driver, they say.

“There does not seem to be genuine demand for several recently listed IPOs as is being projected,” said Deven Choksey, promoter and MD, KR Choksey Investment Managers. “Artificial demand and supply created by margin funding operations has been driving the IPO market. All this is just supported by the bull market sentiment.”

Large traders avail themselves of NBFC funding for IPO subscriptions and corner shares. Grey market punters ensure there is a demand by quoting the issue at a premium pre-listing. All this creates a positive sentiment in the market and attracts buyers irrespective of valuations.

In many cases, NBFCs funding the subscription are linked to brokerage houses or banks promoting the issue.

“The valuation of IPOs and the listing gains they have seen this year are absurd,” said Arun Kejriwal, Director, KRIS, a Mumbai-based advisory firm. “Investors who do not get out of IPOs listed this year may burn their fingers.”

The pricing of insurance company IPOs is a particularly glaring pointer to a bubble. New India Assurance, which listed on Monday, slipped below its issue price on the very first day. The ₹9,600-crore IPO was oversubscribed by 1.19 times but had a P/E of 74.6. Even in large insurance markets like the US and China, average trailing 12-month P/E ratio for insurance companies with positive earnings, in both the life and non-life space, is approximately 20-22.

Among others, the P/E for the ₹8,400-crore SBI Life IPO was 73.30. The ₹8,600-crore HDFC Life had a P/E of 65.91.

“The success of a few IPOs has made it easy for investment bankers to aggressively price their issue,” said SP Tulsian, founder, Premium Investments. “Grey market and liquidity-backed euphoria is the key catalyst for price action in many companies soon after listing.”

The DMart IPO broke all previous subscription records mainly due to the aura of its promoter and ace Dalal Street investor Radhakishen Damani.

Currently, trading at a P/E of around 140, DMart is valued higher than the world’s largest retailer Walmart. The ₹1,870-crore IPO of DMart saw margin funding by brokers worth ₹80,000-1 lakh crore. The issue was oversubscribed 104 times and was quoting in the grey market at a 100 per cent premium to the IPO price of ₹299.

Published on November 15, 2017
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