Photo: Mint (Mint)
Photo: Mint
(Mint)

IPOs flop as revival eludes primary market

This year was expected to be a good year for IPOs, but the poor showing of three initial share sales threatens this logic

Mumbai: Adlabs Entertainment Ltd, which operates the Imagica theme park, failed to sell all the shares it wanted to on Thursday, which was supposed to be the last day of its share sale.

The Mumbai-based company has now extended the sale by three days (till Tuesday, 17 March) and is offering the shares at a discounted price band of 180-215 per share, 41 lower than the existing price band of 221-230.

Earlier this month, the New Silk Route (NSR) Advisors backed cable firm Ortel Communications Ltd saw its share sale barely scrape through as it managed a subscription of 1.01 times the number of shares on offer in the qualified institutional buyers (QIB) segment.

In January, edible oil maker NCML Industries Ltd was forced to withdraw its initial public offering after poor response from retail investors. The company was unable to attract investors despite extending the sale and cutting the price band to 80-90 from 100-120.

Investor and business sentiment improved last year after the National Democratic Alliance government, widely seen to be business-friendly, came to power.

In the year since (although there is no cause and effect), inflation has moderated and factory output looked up. The Reserve Bank of India has started easing rates. This year, 2015, was expected to be a good year for IPOs.

The poor showing of the three IPOs threatens this logic. And it couldn’t be happening at a worse time.

The market is expected to see several small and mid-sized IPOs in the next few months.

IPOs worth almost 2,500 crore are expected this month. These include a 1,000 crore share sale by Inox Wind Ltd, 400 crore share sale each by Power Mech Projects Ltd and MEP Infrastructure Developers Ltd and a 450-500 crore sale by PNC Infratech Ltd.

The poor showing may have to do with the kind of companies selling shares, according to Prithvi Haldea, chairman of Prime Database Group.

The secondary market’s buoyancy, high valuations and absence of any share sales by state-owned companies are also factors, he added.

“The valuations of the issues seem to be stretched. Most of the IPOs in the pipeline are driven by private equity/venture capital investors needing to exit and there is very little primary capital infusion. There is a significant influence of PE/VC (private equity/venture capital) investors on the valuations as they will look at exiting only at higher valuations," said Haldea.

Share sales by state-owned companies could have helped kick-start the primary market as these issues create significant investor interest, especially from retail investors, Haldea said.

“Also, the IPO story is not a good one. In the last couple of years we had many IPOs, mostly of small size, and the after-market performance of most of these has not been good. That hurts investor confidence."

According to a Mint report on 4 January, of the 178 companies that have raised money via primary markets since 2008, shares of 112 companies, or 62.9% of such firms, are trading below their issue price currently, while the stock prices of 60 such companies are above their issue price. Trading in shares of six of these companies have been suspended.

On Thursday, the Adlabs IPO attracted more retail investors than QIBs, perhaps due to a further discount of 12 per share on the allotted price .

According to data from NSE, by 7pm, the issue was subscribed only 0.44 times. Adlabs has put up 17.6 million shares for sale. The firm intends to use the IPO funds to partly repay loans of 330 crore.

“There has been fair amount of volatility in the market and on the day when the issue opened markets fell. The retail portion has witnessed very good response. We have now dropped the price band and this will make it attractive for the institutional and retail buyers to come in," said an investment banker involved in the IPO who did not wish to be identified.

A day before the Adlabs issue opened, the benchmark Sensex fell by 604 points, and on the first day of the issue it fell by almost 135 points.

Earlier, the company’s issue saw tepid response from anchor investors. Anchor investors such as Daiwa India Stock Active Mother Fund, HDFC Infrastructure Fund, Axis Mutual Fund, L&T Mutual Fund and IL&FS Trust Co. subscribed to shares worth 60 crore, but at the lower end of the price band.

“The anchor portion of the issue was heavily undersubscribed and at the lower end of the price band, which resulted in lack of confidence in the issue," said an investment banker working with a domestic investment bank. He spoke on condition of anonymity as he is not authorized to speak to reporters.

In October, the company had raised 50 crore in a pre-IPO round from NYLIM Jacob Ballas India Holdings IV (a company owned and controlled by New York Life Insurance Co.) and Jacob Ballas Capital India Pvt. Ltd.

Ortel’s issue saw a subscription of 0.75 times. Ortel opened its share sale on 3 March and the issue closed on 5 March.

NSR, which put up 6 million shares for sale, failed to sell all of them. The fund initially planned to hold on to 2.1 million shares, but ended up holding on to more.

swaraj.d@livemint.com

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