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After
the failure of banking system in US and the subsequent fall in equities
worldwide, the Indian equity market has bounced back strongly to give
an 81% return in 2009. The momentum and positive sentiment in the
market has driven a number of companies to take the primary market
route to raise money for supplementing their expansion plans. NHPC
Limited raised Rs. 6,039 crores, the largest Initial Public Offering
(IPO) in 2009, as the primary market witnessed an inflow of Rs. 20,343
last year. However, several of these Initial Public Offers (IPOs) and
Follow-on Public Offers (FPOs) are currently trading below their price
band (see Table1). There is a significant line up of public issues in
2010 as well.
Table1:
Primary Market Issuances in 2009
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EDSERV SOFTSYSTEMS
LIMITED
|
24
|
60
|
55.00
|
272.70
|
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MAHINDRA HOLIDAYS & RESORTS
INDIA LIMITED
|
278
|
300
|
315.00
|
460.50
|
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EXCEL INFOWAYS
LIMITED
|
48
|
85
|
93.05
|
62.75
|
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RAJ OIL MILLS LIMITED
|
114
|
120
|
120.00
|
79.70
|
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ADANI POWER LIMITED
|
3017
|
100
|
108.00
|
101.55
|
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NHPC LIMITED
|
6039
|
36
|
39.00
|
35.25
|
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JINDAL COTEX LIMITED
|
84
|
75
|
77.00
|
95.55
|
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GLOBUS SPIRITS LIMITED
|
75
|
100
|
101.00
|
98.70
|
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OIL INDIA LIMITED
|
2777
|
1050
|
1096.00
|
1240.50
|
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PIPAVAV SHIPYARD
LIMITED
|
496
|
58
|
61.10
|
56.65
|
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EURO MULTIVISION LTD
|
66
|
75
|
75.00
|
34.95
|
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THINKSOFT GLOBAL SERVICES
LIMITED
|
46
|
125
|
126.00
|
439.95
|
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INDIABULLS POWER
LIMITED
|
1529
|
45
|
45.05
|
36.35
|
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DEN NETWORKS LIMITED
|
390
|
195
|
195.00
|
183.75
|
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ASTEC LIFESCIENCES LIMITED
|
62
|
82
|
82.00
|
85.65
|
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COX AND KINGS (INDIA)
LIMITED
|
610
|
330
|
343.20
|
427.90
|
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JSW ENERGY
LIMITED
|
3819
|
100
|
106.00
|
117.20
|
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GODREJ PROPERTIES LIMITED
|
462
|
490
|
511.00
|
510.20
|
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D.B. CORP LIMITED
|
385
|
212
|
254.00
|
252.90
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source:
NSE India, iFAST Compilations, 15 January 2010
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Mr
Vetri Subramaniam, Head – Equity Funds, Religare Mutual Fund
shares, “The primary market pipeline consisting of IPOs, FPOs
and QIPs (Qualified Institutional Placements) including disinvestment
by the government will continue to be very active, with anywhere
between an estimated US$15-18bn of capital to be mobilised this year.
Obviously, this will sop up a significant share of allocations to
equities”.
Considering this spurt in number of IPO issuances, we asked Mr
Subramaniam for his view on the pricing of these companies.
“Every IPO has to be treated on its merits based on the
fundamentals of the company and the value it offers. We would not like
to generalize the issue,” he opines, adding that,
“The process of evaluation of a company is the same for the
primary and secondary market.”
If
the fund managers evaluate these companies in a similar manner as any
of the other stocks in the secondary market, why is it that IPOs garner
so much interest?
With an initial public offer, the shares of a particular company are
made available for purchase to the investors for the very first time;
also in a follow-on offer, a listed company puts forward fresh sale of
shares. Through the sale of stock, companies raise money to support
their capital expenditure and expansion plans. Typically, companies
prefer to go for a public issue in a bull market. As a result of
positive sentiment in the market, the shares are well received in spite
of aggressive valuations. According to a study by Assocham, 28 out of
66 companies cancelled their fund raising plans in 2008 owing to the
global slowdown. Earlier in 2006 and 2007, companies from the real
estate sector had listed at huge premiums in the market.
A
large share of the IPOs that came out in 2009 belonged to the Power and
Energy sector but these companies were listed at modest prices on the
exchanges. “We are wary of valuations and execution issues in
the power sector and this applies to the real estate sector as well.
Our approach in these two areas is guided by identification of bottom
up opportunities where we see value,” says Mr. Subramanian
clarifying his stance on both the sectors.
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PSU
delight for dalal street
Going
ahead in 2010, companies from the public sector are expected to dilute
additional stake or enter the primary market. Interestingly, IRDA, the
insurance regulator is expected to lay down the guidelines for
insurance companies as some of the large insurers chart out their
public offer plans. Plans to further water down the
government’s stake in companies like National Thermal Power
Corporation, National Mineral Development Corporation, Power Grid
Corporation and Rural Electrical Corporation as well as offer shares of
Sutlej Jal Vidyut Nigam through an IPO are around the corner.
When asked about
his outlook on
disinvestment of public sector units, Mr. Subramanian said,
“We expect the government to pursue disinvestment very
aggressively in order to bridge the fiscal pressures. This government
is keen to unlock the value of its holdings and this will benefit
investors. Many of these companies were earlier ignored due to limited
free-float and the increased disinvestment will change that and bring
these companies to the centre stage”.
Chart
1 shows the performance of BSE Sensex and BSE PSU Index. Both the
indices have been rebased to 100 for the period from March 2009 till
date. On tracking the relative movement in indices, the BSE PSU Index
has trailed the BSE SENSEX but for the month of January 2010. The news
of disinvestment has fired up the prices of PSU stocks causing it to
surpass the BSE Sensex last month. The rise in the number of
PSU offerings has prompted BSE to come up with a separate website www.bsepsu.com.
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Chart
1: Comparison of Indices
Source:
BSE India, iFAST Compilations
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Conclusion
Even
though 2009 has been a good year, retail investors preferred to stay
away from the lure of IPOs. The disclosures concerning each issue are
stated in the offer document but evaluating a company’s
public issue based on parameters such as the quality of management,
financials, business environment and economic risks may be an uphill
task for a novice investor. Taking an informed decision requires
judicious assessment of pricing and future prospects of the company.
Many investors have burned their fingers in the past owing to hype
surrounding major IPOs as Kenneth Fisher, Chairman of Woodside,
California-based, Fisher Investments Inc put it, “IPO means,
Its Probably Overpriced.” Speaking in reference to the Dollar
General IPO, he says, “IPOs have never been done for the
benefit of the purchaser. IPOs are done for the benefit of the company
by definition. So the history of IPOs is very clear that
they’re money losing activities.”
Thus, the best way for a newbie investor is to follow schemes of mutual
funds wherein the fund manager can do the homework on companies. All
you need to do then is, to match the investment objective of the fund
with your financial goals and risk profile.
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