On Thursday, the benchmark Sensex at the BSE closed at a new high of 31,369. While the secondary market has been buzzing with activity with numerous stocks hitting their all time highs, there has also been a sharp rise in activity in the primary market with several companies coming up with their Initial Public Offers (IPOs) and some of them witnessing bumper listing gains. As the Sensex rose sharply in the calendar 2017 after the conclusion of demonetisation, as many as 13 companies launched their IPOs in the market and a majority of them continue to trade above their issue price. Another 14 companies are set to soon come with their IPOs as they have already filed their draft offer documents with the Securities and Exchange Board of India (Sebi). While a number of companies may come to raise funds and get listed during the current bull run, experts say that investors need to do their due diligence well before investing in an IPO as some companies may not have strong business fundamental or may be asking for a high valuation.
“Investors need to be extremely selective while investing in IPOs. A lot of investors go for listing gains but that is speculative investment and one should not look at that,” said Raamdeo Agrawal, co-founder and joint managing direct at Motilal Oswal Financial Services. He said that investors should not differentiate between IPOs and already listed stocks. “If a listed bank is available at a price to earning ratio of 30 and a bank coming with an IPO is asking for a PE ratio of 20, then also the investor should go for the listed entity,” said Agrawal.
The recent experience
Investors have made decent gains in the IPOs. In the current calendar year starting January, a total of 12 IPOs have been listed on the NSE. IPO of of AU Small Finance Bank has been concluded but it is yet to be listed. In eight out of these 12 IPOs, the current trading price is much higher that the issue price, as per data available with the stock exchange.
Listed on July 4 on the exchanges, stock of Central Depository Services (India) Ltd, for instance, has more than doubled to Rs 291.20 on Thursday in contrast to the issue price of Rs 149. Similarly for other companies such as BSE Ltd, Tejas Networks Ltd, PSP Projects Ltd, Housing and Urban Development Corporation Ltd the share price are trading above the issue price. In the case of Avenue Supermarts Ltd, the company which runs D-Mart stores, the share price has nearly trebled to Rs 879.10 from the issue price of Rs 299.
There have, however, also been cases of erosion in stock prices when compared with their issue prices. Shares of CL Educate, S Chand and Company, for example, are trading below their issue prices. But the overall increase in shares of companies which came out with IPOs have emboldened the investors, as can be gauged from the significant oversubscription being witnessed in the recent IPOs.
Last year, there were a total of 27 IPOs, including that of ICICI Prudential Life Insurance Company, Infibeam Corporation, Ujjivan Financial Services, Equitas Holdings, Thyrocare Technologies, TeamLease Services, PNB Housing Finance and Sheela Foam among others. Share price for 20 of these companies are currently trading above the issue price. While the private sector has been making the most of the bull run, the government too has lined up a series of companies whose shares are expected to hit the market in the current year.
With government approval already in place for listing of five state-owned General Insurance Companies, their IPOs are expected to be launched this year. These companies are New India Assurance Company, United India Insurance, Oriental Insurance Company, National Insurance Company and General Insurance Corporation of India (GIC).
Finance minister Arun Jaitley announced in the Budget 2017-18 that the government will also list shares of railway public sector enterprises like IRCTC, IRFC and IRCON. Among the private companies, Salasar Techno Engineering will launch its IPO on July 12.
Apart from benefiting companies and investors, the run of IPOs have also been profitable for the lenders financing short-term credit to high networth individuals (HNIs) applying for the issue of shares. Rating agency ICRA said in a report on Thursday that IPO financing activity would grow this year due to robust capital markets.
As per ICRA’s estimates, the IPO financing market is pegged at an average Rs 17,500 crore to Rs 22,500 crore per issuance which can go up to Rs 65,000 to Rs 70,000 crore for issuances which are large sized as well as with higher investor interest. “The IPO financing market was very vibrant in 2016-17, supported by an increase in HNI investors’ interest in IPOs in a quest for listing gains,” ICRA senior vice president Karthik Srinivasan said.
“With banks not active in this segment due to regulatory restrictions, the field is dominated by non banking financial company (NBFC) arms of some of the leading players in the capital markets and wealth management businesses,” he added. The median subscription level for the non-institutional investor, including HNIs stood at 80 times for the IPOs in the last fiscal as against 2 times for 2015-16. “This, in-turn, has created a market for providing short-term capital to the HNI investors for funding the IPO application,” the report said.
“In such instances, the HNIs deploy a small fraction of their own capital upfront, that is the margin money, and the rest is raised through short term loans covering the period between the IPO closure and the final listing, thereby allowing the HNI investors to apply for a larger quantum while applying for the IPO,” it added. Apart from high demand from HNIs and institutional investors, the recent IPOs also witnessed multiple oversubscription from retail investors applying for shares up to Rs 2 lakh in a single company.
However, even as the good run continues for companies, investors and financers alike, experts say that retail investors should not look to borrow to invest in IPOs for listing gains and instead should only get into good companies available at reasonable valuations with a longer term investment horizon.