Tepid IPO performance, prelude to big losses: study

Majority of companies that have struggled to attract investor interest during their initial public offering period continue to disappoint investors.

Over the last decade, 15 companies have cut the price band and extended the issue closure date due to poor response from investors, according to data provided by Prime Database. Five companies have had to cut their IPO issue size.

Of these, fundamentals of 17 companies continue to be weak, according to Capitaline. They are either making struggling on the topline or on the bottomline fronts. As a result, they have also been significant value destroyers. For example, Sancia Global, is now trading at 99 per cent lower than the issue price

Prabhat Dairy and Ortel Communications are the exceptions as they have been doing relatively better than the rest. Hence, investors have rewarded them on the bourses. While Ortel’s share price is marginally above its issue price (3 per cent), Prabhat’s stock price is lower by 8 per cent.

“Why a particular company had to tweak its IPO depends on internal and external factors, including who the merchant banker was, how they marketed the company to institutional investors, broader market conditions and risk appetite of investors during the IPO,” said Sharad Awasthi, Head of Research at Spa Securities.

For example, Reliance Power and Adlabs Entertainment witnessed different responses during their IPOs with the former being a super-hit (61.5 times oversubscription) and the latter being tepid (1.1 times) despite both being in a long-gestation period business. Concerns about Adlabs seem to be genuine. In the trailing 12-month period ending December 2015, Adlabs’ sales jumped 34 per cent year-on-year but net losses continued to be around ₹106 crore.

Some companies had to revise their IPO terms despite good performance, either due to challenges in sustainability of the company’s business model or high valuation expectations. During the IPO in June 2006, Prime Focus was doing well with 27.5 per cent and 70 per cent rise in sales and net profit respectively in FY06. In the year of its listing in 2010, Claris Lifesciences’ sales and net profit grew at a compounded annual growth rate of 8 per cent and 19 per cent (2007-2010).

However, performance of both companies has slipped. Prime’s sales in trailing the 12-months ending December 2015 jumped 66 per cent y-o-y but the company’s net losses have widened to ₹262.47 crore, compared to ₹74 crore in the same period last year. Since 2010, Claris’ performance has been slipping. In FY16, the company’s sales declined 5 per cent to ₹738.87 crore, incurring a net loss of ₹58 crore compared to a profit of ₹149.48 in FY15.

Prime Focus provides end-to-end creative services, technology products and services, production services and post production services to studios, broadcast and advertising industries. Very few media related companies are doing well fundamentally. Similarly, Claris Lifescienes has faced quality issues in the past.

“The promoters as well as merchant bankers have to understand market appetite and justify the price,” said Manish Bhatt, Vice-President, primary markets division at Prabhudas Liladher.

Prabhat Dairy had to do all three — cut price band, extend issue closure by three days and halve the offer-for-sale portion in September 2015, mainly due to poor market conditions. Nifty 50 had crashed by 7 per cent in August on account of the China yuan devaluation move which had rocked the world markets.

The trailing three quarter performance remains a concern as net profit witnessed a decline of 14 per cent y-o-y. Sales growth has been strong at 20 per cent and not a big concern. But profitability has improved in the December 2015 quarter after declining at a drastic rate in the previous two quarters.

Whether this will be sustainable remains to be seen. Parag Milk Foods has seen better acceptance by analysts than Prabhat during the IPO as the former has better brand visibility and presence. Despite this, Parag Milk also had to revise the price band and extend date of closing of the IPO. This has happened for the first time in 2016.

Ortel Communications’ financial performance in FY16 has been better than in FY15 when it got listed. The company reported revenue growth of 21 per cent and net profit has more than doubled to ₹11.93 crore.

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