India Economy

IPOs not the flavour of the season

Bhavana Acharya | Updated on November 16, 2017 Published on August 25, 2012

IPOs are turning unattractive. — Paul Noronha   -  Business Line


Investors would have gained more in the secondary market than through initial public offers.

The spotlight is back on initial public offers, subsequent to the Securities and Exchange Board of India’s move to encourage retail participation in assuring allotment.

But IPOs (and further issues of listed companies or FPOs) are far from their heydays. Nor is their performance anything to crow about.

Money raised from the IPO/FPO route is down to a trickle. After tapering off in the adverse market conditions of 2008 and 2009, IPOs made a comeback in 2010.

Since then, though, IPOs have been on the decline, as has equity fundraising through institutional placements (QIPs). But both IPOs and QIPs have fared badly in terms of returns, with most trading well below their issue price.

The number of companies turning to rights issues, though, remained fairly steady. A handful of issues such as State Bank of India’s massive Rs 16,736 crore issue in 2008, skewed the overall picture of the amount raised.

Waning interest

As far as IPOs go, with less than ten offers hitting market since this January, they are hardly the flavour of the season. It’s a long way from the 37 offers that cropped up in 2011 and 67 before that. While the IPO and FPO market is drying up, retail investor interest in offers also seems to be waning.

Apart from big-ticket issues such as MCX and NBCC, offers have not been lapped up this year.

Even fancied issues such as Speciality Restaurants and Tribhovandas Bhimji Zaveri could not attract investors, with the retail portion of these issues being woefully under-subscribed. Speciality Restaurants, for instance, had a 52 per cent retail subscription against a 468 per cent institutional subscription.

But in the years before the current calendar, few issues fell short of subscriptions in the retail category. Even smaller issues such as RPP Infraprojects, Flexituff International, Man Infraconstruction, and Tree House Education & Accessories garnered a strong retail response, with the retail segment being oversubscribed.

Needless to mention, investors flocked to much-hyped issues such as Muthoot Finance, Lovable Lingerie, Coal India, and PTC Financial Services.

Quality on the slide

IPOs are required to be analysed by rating agencies and graded according to the strength of the company’s fundamentals.

From poor to excellent, IPO grades range from 1 to 5. Now, IPO grades are not meant to indicate an ‘invest’ in the offer or not. But if grades are used as a yardstick for quality, issues have taken a dip of late.

In 2011, for instance, six of every ten issues that came up were classified as having poor fundamentals.

For instance, there was a spate of issues towards the end of 2011 — OneLife Capital Advisors, Indo Thai Securities, Taksheel Solutions, Prakash Constrowell and RDB Rasyans. All these issues were graded either 2 or 1 by rating agencies. In contrast, just about four in ten issues sported low grades in 2010.

The year saw a number of issues such as MOIL, VA Tech Wabag, IL&FS Transportation Networks, Mandhana Industries, and so on, judged to have at least reasonably strong fundamentals of 3 or 4.

Poor performers

What makes it worse for investors with a long-term perspective is the performance of the issues on the bourses once listed.

More than three-quarters of all offers which came out in the last six years are trading below their issue price. Juxtaposing this performance with the BSE 500 index (representing broad market) too, issues have been worse off. For instance, the much-talked about issue in May this year of jeweller TBZ is already 11 per cent below issue price.

In contrast, the Sensex and the BSE 500 are up 8 and 7 per cent respectively. Issues that came up last year and which have lost over 80 per cent of their issue price include Indo-Thai Securities, Tijaria Polypies, and Ravi Kumar Distilleries, to name a few.

When it comes to sectors, though, the performers are a motley crew, with a mix of poor and outstanding performance within each sector.

The lesson here is that an investor would have been better off putting capital in secondary markets over investing in initial public offers.

Published on August 25, 2012
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