Boom or bubble

Boom times for the primary market in India have often coincided with market tops. Therefore, it is with some trepidation that one must welcome the record fund-raising by Indian firms through IPOs, offers for sale and follow-on offers this year. Data from Prime Database states that primary mop-ups in the first six months of FY18 at ₹38,460 crore, had already overtaken the ₹36,615 crore raised in the whole of FY17, with a strong pipeline of upcoming offers. The primary market revival has many positive fall-outs. New listings help absorb the tide of liquidity that is flooding into the market as domestic institutions such as mutual funds, insurers and pension funds ride retail fancy. The IPO resurgence has also come in handy for private equity investors to exit their vintage investments and for the Centre to fast-track its disinvestments.

There are three key points of difference between this IPO boom and previous ones. One, the primary market booms of 2010-11 and 2006-08 were characterised by runaway response to firms and promoters of all hues, but this time around investors have turned more selective. Despite being timed within a few weeks of each other, for instance, recent IPOs of General Insurance Corporation and Indian Energy Exchange received bids for a modest 1.4 to 2.3 times shares sold, but MAS Financial Services, Godrej Agrovet and Prataap Snacks were over-subscribed 47 to 128 times. Offers from consumer-facing sectors with visible growth seem to be more sought-after than ones from capital-guzzling or heavily regulated ones. Two, a majority of offers this time around are from private equity-backed ventures. While this guarantees reasonable fundamentals and governance, it sets a high bar on the offer price and a lion’s share of the capital is pocketed by PE investors, rather than the firm. Three, the big over-subscription numbers to recent IPOs have been driven more by institutions and high net-worth bidders than the retail crowd. Given the rising complexity of IPOs and their patchy record, this isn’t an unwelcome trend.

But all this does not mean that the primary market is devoid of froth. One aspect on which the current IPO boom is no different from previous ones is on the stiff pricing of most offers. While the market has been frugal in valuing conventional businesses, it has been quite liberal with handing out ‘scarcity’ premia in the form of unrealistic three-digit PE multiples for consumer firms. The brisk IPO financing activity that has underpinned HNI bids can also end in grief if a few firms list below offer price. It is domestic institutions who need to take note of these risks and stay away from the flipping game. In the past, small investors often lost money in IPOs because they were blind-sided by the lure of listing gains. But professional money managers, who have a fiduciary duty to exercise their best judgement, cannot afford to do that.