The buzz in the primary market

Lokeshwarri S K | Updated on January 17, 2018 Published on August 07, 2016


NIMESH MEHTA Full-time investor and trader

RAJESH SANGHVI Investor and Entrepreneur

What are the checks one needs to run before investing in IPOs? Here are insights from investors and traders

The action in the primary market is clearly heating up. Companies are vying with each other to make public offers and investors are scrambling to subscribe to these offers. Thirteen companies have made primary offers on the main platform, raising ₹9,300 crore between January and mid-July this calendar. This is far higher than the amounts of around ₹1,200 crore raised in 2013 and 2014 and ₹13,600 crore raised in the whole of 2015.

It is not just the slew of issues, but their performance too that has been contributing to whipping up a frenzy. Barring L&T Infotech that listed at a discount to its offer price, all the other recent issues have delivered bumper returns to shareholders. Quess Corp, for instance, is up 86 per cent since its listing. Others such as Parag Milk Foods (43 per cent), Ujjivan Financial Services (146 per cent) and Equitas Holdings (77.4 per cent) have also yielded bounties.

Many of these companies have also been listing at a large premium. This is leading to large over-subscription by investors who intend to offload the shares on listing. Quess Corp, for instance, gained 58 per cent on listing day, leaving everyone spell-bound. This business service solutions provider was lapped up because it is a subsidiary of Thomas Cook. Others such as Mahanagar Gas, Thyrocare and Equitas, too, delivered strong listing-day gains.

Why the optimism?

“A few good businesses have come to the IPO market recently and have received good responses. However, the huge over-subscription in most of the IPOs is also a function of the prevailing optimism in the secondary markets,” says Kamlesh Rao, CEO, Kotak Securities. “Another reason for the over-subscription is the surplus liquidity floating in the markets. These monies have found a way to enter the IPO markets.”

Investors are, however, not complaining and making the most of this strong IPO market. Rajesh Sanghvi, an investor and an entrepreneur, who has a sub-broking franchise of Motilal Oswal Securities, applied in many of the recent issues including Equitas, Ujjivan, Parag Milk Foods, Thyrocare, Mahanagar Gas and Quess Corporation. “If I see potential in a stock, I hold it. But if the price is high purely due to demand-supply mis-match, I prefer to sell,” says Rajesh. He continues to hold Equitas since he sees potential in that business.

Nimesh Mehta, another full-time investor and trader, who has been investing in markets since 1999, thinks that lack of alternative avenues for investment is one of the reasons why there is so much interest in IPOs. “Fixed deposit rates are coming down and stock markets are also volatile,” he says. “The feedback I am getting from my mutual fund distributor is that they are attracting more than ₹3,500-4,000 crore in mutual fund SIP alone.” He thinks that this money is flowing into the equity market, driving demand for IPOs too.

But many investors do not intend to hold on to these shares for too long. “As it is, IPOs are coming at high valuations. So if I get 30 to 40 per cent gains on listing, I do sell them off,” adds Nimesh.

Modus operandi

With the massive over-subscription in IPOs, investors prefer to invest in the retail category through multiple folios, in the names of their family members to ensure allotment.

Efforts on the part of the market regulator SEBI to check speculative activity on listing day, simplify the IPO process through e-IPOs and shortening the time between the offer and listing are also bearing fruit. “Nowadays we don’t have to lock money in IPOs, if you go through ASBA,” says Sanghvi. “It just gets blocked and gets debited only against allotment. You also realise your investment in just 5 to 6 days, if you sell on the listing day.”

Are his clients also similarly interested? “Yes, nowadays almost all clients are interested in applying for IPOs. The ease of applying in IPOs is also a big plus,” says Sanghvi.

SEBI recently introduced e-IPOs, where just with a few clicks, the IPO application is done. The balance in the stock trading account can be now used for applying in issues.

Due diligence?

What are the checks that investors need to run before investing in IPOs? “The check-list for investing in an IPO is no different from that of selecting a stock in the secondary market. Promoter quality, end-use of money which is being raised, industry prospects, economic moat (competitive advantage that one company has over other companies), future growth and profitability are key factors. Additionally, investors should focus on the consistent past track record of the company across business cycles, if the data is available,” lists Rao

“I read Business Line for advice,” says Sanghvi. “We also speak to peer brokers in Chennai and Mumbai to find out their views on the offer.” Nimesh prefers to read the company’s prospectus and do his research before investing in an IPO.

Many investors look at the grey market to understand if they should invest in a public issue. The grey market indicates the premium a stock could list at by capturing the pre-issue demand for the offer. A thriving grey market is usually a signal that there is speculation in the market.

“But these indications can go quite wrong,” says Nimesh. “For instance, in the L&T Infotech IPO, the premium was ₹100, but it listed below offer price. 10 out of 9 times the grey market is right. But in UFO Movies too, the grey market premium was ₹150-200 but by the time it listed, the premium had vanished.”

Need for caution

There are, however, signs of overheating in both primary and secondary market. “We would recommend investors to be careful if they are applying only for listing gains. Markets have witnessed a rapid rise in the past few weeks but this buoyancy has to sustain till these IPOs get listed, for people to make listing gains. Companies with sub-par fundamentals will find it difficult to sustain in tougher market conditions,” says Rao. Investors, too, seem to be aware of the need to tread cautiously at these levels. “Some pockets of the market do look overheated. I am booking some profits in my portfolio,” adds Mehta.

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Published on August 07, 2016
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