Cinevista listing at discount shocks IPO market

Small investors now blame big financial instituions who have bid at a higher price than the indicative price of Rs 200 when the book-building portion was open for subscription. The scramble for the scrip by FIs had tempted many small investors to invest in the ICE scrip. “Investors are now panicky as the recent trend in new IPO listing is not very encouraging. And now Cinevista has disappointed them further. Everybody wants to get out before they lose even their principal amount,” investors said.

Analysts expect the slump in stock markets to deter many smaller companies who had hoped to ride the IPO bandwagon but now fear a fall in their valuations. The Securities & Exchange Board of India (SEBI) approved two initial public offerings (IPOs) filed by media companies. These are: Creative Eye Ltd, a television software producer, and television software producer Pritish Nandy Communications Ltd.

“Valuations of media companies are highly debatable, particularly for concept stocks belonging to sectors like media and Internet… these shares are in demand only when markets are in a frenzy and traditional valuation models do not hold good," said an analyst at a domestic research house. "There are some subjective parameters when putting a price to these companies such as the inherent strength, the kind of library it owns and its dominance. Therefore the PE multiples vary from 10 to even some loss-making companies getting priced highly on the basis of future earnings potential," he said.

Cinevista would not be able to issue shares at a price higher than Rs 150-200 if it had made an IPO in the current market conditions. Issue managers advised caution for aggressively priced IPOs. "Most IPOs which we have seen in the last year were outrageously priced and were in tune with the market conditions rather than the fundamentals," said a top official. “One should not be surprised if small investors lose thier shirts now,” he added.

"These valuations will have to normalise, otherwise issues will not sell," he said. Bankers said companies may do a rethink on underwriting arrangements as well. "In the last year, most issues made were not underwritten because the buoyant markets ensured large over subscriptions, so the issuer saved up to 2.5 per cent which he would have had to pay the underwriter," said an official at a state-run issue manager.

Cadila Healthcare and Elder Pharma are two other companies which shocked investors with a discount listing last week. When compared to its initial offer price of Rs 110 per share, the Elder Pharma scrip was listed at Rs 70 on the BSE, a discount of almost 37 per cent. At the end of its first day on the bourse, the Elder stock had already seen a depreciation of around 73 per cent over its IPO price closing at Rs 41.

Indicating that the IPO boom is over, Cadila’s poor performance on the bourses continued for the second day running as the stock hit the lower circuit limit at Rs 119 on the BSE and closed at the same level. On Thursday, the Cadila Healthcare stock was listed on the BSE at 40 per cent discount to its early-February offer price of Rs 250. The stock was first quoted at Rs 149 in late morning trade after it was listed at a price of Rs 196.90. Cadila made a public offer of its shares in February this year at a price of Rs 250 per share.

Even as the infotech boom on the stock markets has stated showing signs of petering out, a host of companies from the sector have rushed to the Securities and Exchange Board of India (SEBI) with their initial public offering (IPO) plans. However, with the stock markets looking downward, merchant bankers are not sure whether most of the IPOs will go through in the near future. Besides, nearly 100 other companies had lined up to raise around Rs 5,000 crore from the public before the end of the current boom.