IPO market at the crossroads

Experts seek decent valuations, stable stock markets for survival of IPOs

Deccan Aviation MD Captain G. R. Gopinath says it’s just plain coincidence that the market crashed when the company came out with an initial public offering (IPO) and listed its shares at a huge discount recently. ‘‘I don’t think that the performance of the Sensex or that of our scrip is a reflection on the Indian economy or Deccan’s fundamentals,’’ the chief of the low-cost airline says. Deccan’s share, which was sold at Rs 148, is now quoted at Rs 89.10, resulting in huge losses for investors. It’s not only Deccan, many other new issuers got a severe drubbing in the recent market crash. Out of 27 companies that raised funds from the public in the last two months, only four managed to stay afloat and remained above the offer prices last week.

The big question now is whether the IPO party is over or not. Seeing the huge demand for IPOs in the last one year, a host of corporates had announced their plans to raise money through the IPO route. With the ground realities changing, the IPO pipeline has already started getting shorter.

MCX, a leading commodity exchange, is going ahead with the IPO despite the recent developments. Similarly, DLF which is planning to come out with the largest-ever IPO of Rs 13,000 crore is also going ahead with the plan. While, JSW Steel which had planned a rights issue withdrew the offer document in view of the volatile stock and commodity markets. Varun Shipping has also deferred its Singapore Depository Share issue following the recent developments. Even Cox & Kings has deferred its IPO plans.

Story continues below this ad

With the debate revolving around the valuation front, Prithvi Haldea, MD, Prime Database says: ‘‘In today’s market condition where investors are hard to come by, companies have to lower their valuations for inviting prospective customers… And companies with strong fundamentals are reluctant to do this.

However, investor bodies like Investors’ Grievances Forum (IGF) have already started complaining. ‘‘It’s difficult to subscribe to public issues at such abnormally inflated premiums, projections and returns,’’ says IGF president Kirit Somaiya.

In fact, valuation has been a contentious issue ever since the creation of the IPO market. One school of thought says that valuation should be linked to fundamentals. Whereas, another view believes stability in the stock markets as being an important factor in the success of the IPO market. Very few investors prefer to put money when the market is very volatile and shows 3-5 per cent rise or fall in a day.

With the Sensex having fallen nearly 3,000 points from the May peak of 12,671, analysts are expecting delays in new IPOs and cut in valuations.

Story continues below this ad

Though good companies with sound fundamentals are unlikely to be unnerved by the market swings, companies floated by new promoters and new business models are likely to find the going tough. ‘‘I don’t think that there is any issue of prolonging the IPO. We have already received Sebi’s observation and are preparing to come out with the issue soon,’’ GMR Group Head Strategic Finance Madhu Terdal said.

The IPO market witnessed a tough time in the late 90s and after the market crash in 2000-01. This time, investors are worried about the continuing volatility and the impact of global stock and commodity markets on Dalal Street.

ON THE IPO STREET

• DLF Universal

• GMR Infrastructure

• SBI associate banks

• MCX

• Canara Bank

• Power Finance Corp

• Power Grid Corp