Investors in initial public offerings (IPOs) are finding that new issues are not yielding instant returns, irrespective of pedigree and size. Shares of two companies that recently had IPOs—Adani Power Ltd and NHPC Ltd— are trading close to their IPO price. The argument goes that pricing was stiff and both companies should have left something on the table for investors. But issue pricing affects companies and offerors as much as investors. Their priorities will determine whether investors can make easy profits or not.
When promoters are off loading part of their stake in an offer for sale, the priority is to get the best price for their holdings. In NHPC’s case, the government was selling part of its stake to use these funds to meet its spending needs. That objective is more important for the government. The government has also become savvier, and can see ample institutional interest. It sees no harm in benefiting from it.
From a company’s viewpoint, when fresh capital is being raised, a higher price will mean lower equity dilution. That serves the company well in the longer run. Also, if a share is sold for Rs10 and it lists at Rs50, it may appear that the company misjudged the true value of the shares. Issuers judge at what price institutional investors will be willing to subscribe, through informal interactions.
This price will be based on forecasts, peer comparison and market valuations that will be analysed by these investors. Retail investors typically tag along at the same price.
The risk lies that the institutional investor may have a different time frame for investment from that of the retail investor. But IPOs have come to be judged by their listing day gains, though equity investing is supposed to be a long-term exercise. New issues are supposed to create wealth in a month’s time. While that may have happened when the markets were in a frenzy, it may be unreasonable to expect that currently, even though stock markets are doing quite well at the moment.
These two IPOs, too, got a huge response, being over-subscribed by at least 20 times. But the pent-up demand for the shares, interestingly, did not drive up prices. Perhaps it’s the size of the issue that is making a difference. Some of the over-subscription could be illusory, as investors apply for more shares simply to ensure they get the desired quantity of shares. The true demand is thus only a fraction of what is visible. When the allotment is done, there is no further interest in mopping up shares from the secondary market. Retail investors need to recognize that the wait for pay-off from investing in IPOs may have become longer.
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