Photo: Mint
Photo: Mint

Volatile markets spell trouble for burgeoning IPO pipeline

The experience of the five IPOs that have come to the market in the two weeks since markets turned volatile has not been good

Mumbai: A 1,600 point fall by the BSE Sensex on 24 August seems to have changed the environment for IPOs (initial public offerings) just around the time appetite for such initial share sales seemed to have revived and with a healthy pipeline of companies waiting to go public.

The experience of the five IPOs that have come to the market in the two weeks since markets turned volatile has not been good. Their bankers had to work hard to ensure that the IPOs were fully subscribed.

“It was a black swan event," said an investment banker involved in one of the five issuances, referring to the 24 August crash, caused by concerns over the Chinese economy.

The crash affected everyone, but high net worth individuals (HNIs) were the quickest to turn away from the market. HNI subscriptions tend to be an important part of IPOs even though some often invest only to take advantage of gains when the stock lists.

“Several HNI investors asked us not to call them as they had decided to stay out of the IPO market," said the banker mentioned above, asking not to be identified. With secondary market securities becoming cheaper, some HNIs switched their focus away from primary markets, he explained.

Another unexpected event that roiled markets was the agitation by the Patel community in Gujarat. This disrupted stock broking services in the city and reduced HNI demand from cities such as Ahmedabad, Rajkot and Surat, bankers said.

Demand from institutional investors, which account for 50-75% of subscriptions of an IPO, also dried up, they added. And institutional finance became scarce.

“The crash and the extreme volatility afterwards created a situation where these financial institutions which lend to HNIs to invest in IPOs either withdrew completely or cut down their lending substantially," said a second investment banker, also involved in one of these issuances, and who too did not wish to be identified.

The lower demand has reflected in the subscription levels seen across the five IPOs over the last few weeks.

The primary issue for Navkar Corp. Ltd, which listed on the bourses Wednesday, was subscribed 2.84 times. Pennar Engineered Building Systems Ltd closed with a subscription of 1.15 times; Shree Pushkar Chemicals and Fertilisers Ltd managed a subscription of 1.33 times; and Sadbhav Infrastructure Project Ltd’s IPO was subscribed 2.24 times.

“We were expecting subscription to be around 4-5 times of our IPO size," said Punit Makharia, chairman and managing director of Shree Pushkar Chemicals and Fertilisers.

Pennar Engineered Building Systems, Sadbhav Infrastructure and Navkar Corp. did not respond to e-mails seeking comment.

A banker involved in the Navkar Corp. IPO said that the issue could have easily seen subscription of more than 20 times if markets were better.

The worst hit was the share sale of Prabhat Dairy Ltd which only managed a subscription of 0.77 times even after the firm extended the IPO dates and cut the price of the issue.

“Once you are in that mood, you have spent money on advertising and a lot of other efforts have already gone into the IPO, you want to go through with it," said an investment banker, involved in the Prabhat Dairy IPO, explaining why the company decided not to withdraw the issue.

Bankers, however, remain cautiously optimistic that the market volatility will die down and the many primary issuances lined up will be see a good response.

“We are cautiously optimistic about the market for the remainder of this fiscal and we feel that one can get quality deals done. Bankers will have to do that extra amount of hard work, so that even if there is market volatility due to global factors, the issue will close successfully because of the quality of investors in the anchor and main book," said V. Jayasankar, senior executive director and head of equity capital markets at Kotak Mahindra Capital.

Data from Securities and Exchange Board of India shows that so far in 2015, 26 firms have filed their draft IPO papers with the regulator. Of these, only five firms have launched their IPOs.

Many of these firms are backed by private equity (PE) investors who are banking on a revival in the IPO market to exit their investments.

None of the IPOs in the pipeline are likely to launch in September, said bankers, and promoters are waiting for market conditions to improve.

“Right now it’s wait and watch for firms planning to launch IPOs. It is difficult to budget (for) things like the crash that happened because of China. One has to ensure that the institutional investors that one has spoken to and the price are sticky enough to overcome such market volatility," said Venkatraghavan S., managing director, IDFC Securities Ltd.

“While we may not see launches in September, we will see several filings. People who were planning to launch in September will look to do so around October-end and later," he added.

According to data from Prime Database, after a lull of two years, 15 firms have raised about 6,348 crore through IPOs in 2015.

This is already more than the total raised in the last two years. In 2014, five firms raised 1,201 crore from the IPO markets, data from Prime Database shows. In 2013, three firms had raised 1,284 crore.

Bankers add that there is a silver lining to the market volatility which will weed out the speculative investors who only subscribe to IPOs for listing day gains.

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