Mumbai: India’s primary market has been the most vibrant in 2017, with companies raising a record amount, but nearly one-third of these stocks are trading below their issue price. Data from Prime Database showed that Indian companies raised a total of Rs1.39 trillion from the primary market in 2017, exceeding the previous high of Rs1.04 trillion in 2010.
Of the amount raised in 2017, Rs65,086 crore was raised by companies through 28 initial public offering (IPOs) on the main board of exchanges.
Ten of these 28 companies are trading below their offer price.
Bankers and experts said that IPO valuations have shot up in line with the overall bull market and there is little evidence of froth building up in the primary market.
The benchmark Sensex rose 0.33% to a record close of 33,685.56 points on Friday, and is up more than 25% so far this year.
“The success of an IPO depends on the response to the issue, and how does it fare on the listing day. A lot depends on the mood in the market on the day of their debut, too," said Prithvi Haldea, chairman of Prime Database, a primary market tracker. Haldea says he classifies the primary market scenario in four zones—good company at attractive price, good company at expensive price, bad company at good price, and bad company at expensive valuations.
“In that matrix, we are still in the good company-good price zone, but may be moving to good company–somewhat higher price zone in a few pockets," said Haldea.
The 10 companies that were listed this year and are trading below their offer price are CL Educate Ltd, S Chand and Co. Ltd, GTPL Hathway Ltd, Bharat Road Network Ltd, Matrimony.com Ltd, SBI Life Insurance Co. Ltd, General Insurance Corp. of India, Indian Energy Exchange Ltd, Security and Intelligence Services India Ltd, and Eris Lifesciences Ltd.
On the other hand, the stocks which were listed in 2017 and more than doubled from their issue price are Avenue Supermarts Ltd, Shankara Building Products Ltd, Salasar Techno Engineering Ltd, Central Depository Services (India) Ltd, Apex Frozen Foods Ltd and PSP Projects Ltd.
“The pricing also depends on what kind of market it is. A bull market will pull up valuations. It also has to be close to the peer zone of the company, and not way below that level, as investors might start questioning as to what the company up to, and if everything is fine with it," said Haldea.
Abundant liquidity has ensured that IPOs are sailing through without hiccups. Leveraged investments by high net worth individuals has led to high subscription levels in some cases, as bumper listing and shorter time period between opening of IPOs and their listing date has made this proposal attractive.
Foreign institutional investors (FIIs), who had turned net sellers of Indian shares in August and September, seem to be returning and were net buyers in October.
Year to date, they have pumped in a net of $5.8 billion in Indian equities. Domestic institutional investors (DIIs) have deployed a net of Rs71,814.58 crore in Indian markets so far in 2017, aided by a surge in inflows from retail investors as falling interest rates prompted them to divert their savings to equity markets. “What is happening is, liquidity is abundant and rising, with too much money chasing few good options," pointed Haldea.
Bankers shared the view.
“If you take all IPOs combined together, you can expect 10-15% annualized return. That is still very feasible. One has to have a longer term investment horizon right now though, rather than a shorter one," said Dharmesh Mehta, managing director and chief executive officer of Axis Capital Ltd.
“Every IPO is not going to do well. We can’t rate a basket alike. Investors are very actively investing in the IPO market," said Mehta.
According to Mehta, one cannot expect 40-50% listing gains right now, given the surge in valuation of broader markets.
“At higher valuation and prices, expectations too have to come down," said Mehta.