After two subsequent years of weak primary market activity, the growth of 30 per cent in the benchmark Sensex at the Bombay Stock Exchange in the calendar 2014 is finally looking to have an impact on initial public offerings as several companies have already come with their issues this year and there are many more who have either filed their draft prospectus with Sebi or have already received the regulators nod. While the total money raised through three IPOs in 2013 stood at Rs 1,284 crore the amount raised through five IPOs in 2014 stood at only Rs 1,199 crore. However, in comparison to them, the first three months of 2015 have already seen three issues hitting the market and they have collectively raised Rs 1,660 crore which is higher than those raised the full calendar years in 2013 and 2014.
Several companies are set to approach the capital market to raise funds and get themselves listed but experts say that investors will have to be careful in picking up the issue. While they can also look at already listed entities having strong fundamentals and that are trading at attractive valuations, they can also look at the forthcoming disinvestment’s planned by the government.
It has been some time that the vibrant IPO market has been missing from the Indian markets and for investors to participate in good investment stories. While three issues have already come in this calendar year—INOX Wind, Adlabs Entertainment and Ortel Communications—and have witnessed participation from retail investors too, there are nine public issues including that of Rashtriya Ispat Nigam Limited that have already received the Sebi approval to launch their issues. They can raise a total of upto Rs 3,600 crore. Data accessed from Prime Database also shows that there are ten issues including that of Videocon D2H and UFO Moviez that are awaiting the regulator’s approval to launch their issues. These ten issues can potentially raise around Rs 4,642 crore.
If the equity markets remain strong and these 19 issues hit the market this year then the total money that could be raised from the market from these issues itself would amount to atleast Rs 9,900 crore.
“IPOs, in this bull run, have come with a big lag to the jump in the secondary market in comparison to previous years. While activity is picking up, I don’t think there is going to be a deluge of IPOs this time around. However, one is likely to see better quality issuances primarily due to selective investor interest,” said Pranav Haldea, managing director, Prime Database.
There are others who agree to this and say that while the regulator is also closely watching the issues from governance point of view, the merchant bankers too are practicing caution in picking up the mandate.
“Both the regulator and the investors have become smart. The regulator is doing a close check of all the companies coming up with their issues. While free pricing is not allowed anymore, good businesses with good governance coming at a right price only seem to be getting the regulator’s nod,” said the head of an investment banking firm who did not wish to be named.
What should you do?
The simplest formula that retail investors can follow is to just look at the investment pattern of institutional investors who do the proper due diligence and invest. Retail investors can invest in the IPO on the last day of the issue date if the institutional investors have participated in good numbers. In this case there is a high probability that investors will get listing gains. However, that is not all that you should do, say stock researchers.
“The key consideration for retail investors should be to look at the business model of the company and it should make sense. They should also check for listed peers within that sector and do the comparison. If the listed entity has a strong balance sheet and is available at attractive valuation then one must go for that only. However, in case of companies operating in niche business, investors should take a cautious call because the real price discovery only happens post-listing,” said Pankaj Pandey, head of research, ICICIdirect.com.
Keep an eye on disinvestments too
While the available investment amount with retail investors is limited they also will have to keep an eye on the government’s disinvestment programme.
In his budget announcement for 2015-16 the finance minister Arun Jaitley set an aggressive target of Rs 69,500 crore to be mobilised by way of disinvestment and strategic sale in state-owned companies in the financial year 2015-16. While Rs 41,000 crore has been earmarked to be raised from minority stake sale in public sector units, the FM plans to raise another Rs 28,500 crore from strategic sale in some state owned companies.
So while the IPOs have to be looked and evaluated, investors will have to closely watch out for attractive disinvestment options where they may get to invest in good quality companies at a discounted price to the market price.