IPOs begin to lose steam, being traded at discounts

IPOs begin to lose steam, being traded at discounts

Mumbai: Investors are being advised by stock-market analysts to buy Oil India Ltd (OIL) shares as a long-term pick and not for the prospect of immediate listing gains, citing the issue’s steep pricing as well as the dismal performance of recent initial public offerings (IPOs).

The state-owned oil explorer is selling 24 million shares in an initial public offer (IPO), starting on Monday, seeking to raise up to Rs2,777 crore at the upper end of the price band of Rs950-1,050 per share.

OIL’s share sale is the highest-priced IPO since Jet Airways Ltd raised Rs1,900 crore in 2005 at Rs1,100 per share. Jet Airways listed at a premium of 18% at Rs1,305 in February 2005.

Since then, only three Indian firms have listed above Rs1,000 per share. They are engineering and construction firm Punj Lloyd Ltd (at a 51% premium in December 2005, at Rs1,057), broadcaster Sun Television Network Ltd (at a 67.5% premium at Rs1,466, in April 2006) and financial services provider Edelweiss Capital Ltd (at Rs1,509, a premium of 87%, in December 2007).

Some analysts are finding the OIL price band too steep, especially in comparison with Oil and Natural Gas Ltd (ONGC), India’s biggest explorer, whose shares closed at Rs1,177 on the BSE on Friday, a 12% premium over the upper price band of OIL.

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According to Arun Kejriwal, director, Kejriwal Research and Investment Services Pvt. Ltd (Kris), a Mumbai-based investment firm, many investors hold that ONGC should enjoy a 9-11% premium over OIL because of its sheer size.

“In that case, pricing of OIL at the upper band leaves nothing for the investor on the table after listing."

But not everyone agrees with Kejriwal. Abbas Merchant, vice-president, Jaypee Capital Services Ltd, said, “The interest in OIL is good and the issue will be fully subscribed. The pricing is competitive. In P-E (price-earning) terms, it is at a discount to ONGC, its peer."

CLSA analysts Somshankar Sinha and Vikash Jain also said OIL fares better than ONGC on certain parameters. Without specifying a time frame, they have set a target price of Rs1,250, a 20% upside.

OIL is in the business of exploring, producing and transporting crude oil and natural gas onshore. Its business model closely resembles that of ONGC but in terms of size, it’s just about a tenth of ONGC.

“While similar to ONGC in structure (especially its vulnerability to policy action), OIL is better placed on reserve accretion, medium term crude production growth and longer term gas production growth; it also has higher net cash levels relative to its size," Sinha and Jain said in a 3 September note to clients.

Investors are not hugely excited about the IPO and the lacklustre performance of recent public issues has dampened sentiment.

Pankaj Sharma, 21, a retail investor based in Mumbai, borrowed Rs50,000 at 10% interest to invest in NHPC Ltd IPO. He has not made money, with NHPC listing only at a marginal premium and its share price later dropping below the issue price.

Three of the four IPOs that were listed in August are trading below their offer price. Raj Oil Mills Ltd, which listed on 12 August, is the worst performer among them, quoting at 30.75% below its issue price at Rs83. Raj Oil Mills raised Rs114 crore at a price of Rs120 per share.

Shares of Adani Power Ltd and NHPC, which had far bigger public issues, are also trading below issue price. Adani Power closed at Rs98.6, a 1.4% discount to its Rs100 offer price, and NHPC closed at Rs35.25, a 2.08% discount.

“Power projects are not built in a day. Investors need to understand this and invest for a long term," said Dharmesh Mehta, head of broking at Enam Securities Ltd.

According to Mehta, one of the critical determinants of an IPO’s success is its timing, especially when the markets are volatile. It normally takes almost a month for an issue to list after it is priced.

The pricing of Adani Power and NHPC was decided when the deficient monsoon was not a big concern, but by the time they listed, the spectre of drought became a key concern. “This has affected their listing," he said.

Another important factor, Mehta said, is a ban on derivatives trading on IPO stocks for the first six months. The capital market regulator had earlier allowed the exchanges to introduce derivatives trading on shares at the time of listing in the cash market, if the net public offer was at least Rs500 crore.

Both DLF Ltd, the country’s biggest developer by market value, and Reliance Power Ltd, a unit of the Reliance-Anil Dhirubhai Ambani Group, were allowed to enter the futures and options segment on the day of listing. But the norm was changed in October 2008 to allow derivatives trading only after a stock builds up a six-month track record.

“Futures and options clearly add to liquidity," said Kris Shanbag, head of research at Antique Stock Broking Ltd.

If futures and options trading is allowed in new issues, Shanbag said, the volumes can be five times bigger than the cash trades over a reasonable time frame.

Kejriwal doesn’t agree, “F&O is a double-edged sword. While the upside is limited due to the ban, one should remember that it is also limiting the downside," he said.

Reliance Power listed at a discount of 17% to its offer price in February 2008 although futures contracts opened on day one.

Ashwin Ramarathinam contributed to this story.

Graphics by Sandeep Bhatnagar / Mint