While Sensex has risen 12.45% this year to touch 38,000 points, the mid-cap and small-cap indices, where IPOs are largely concentrated, have fallen 8.38% and 12.25% since the start of the year
Mumbai: At least 32 companies that have won permission from markets regulator Securities and Exchange Board of India (Sebi) to raise over ₹ 41,000 crore (approximately $6 billion) through initial public offerings (IPOs) are yet to hit the street, as volatility roils company valuations.
While the benchmark Sensex has risen 12.45% this year to touch 38,000 points, the mid-cap and small-cap indices, where the IPO pipeline is largely concentrated, have fallen 8.38% and 12.25% since the start of the year, according to data from the stock exchanges.
According to industry experts, negative sentiment and correction in valuations of mid-caps and small-caps have created a pricing pressure on companies looking to launch IPOs, forcing them to reassess their plans.
“There are two major concerns for any investor—the company and the pricing of the issuance. The pipeline today consists of companies that are all above a certain threshold, they have a profit track record and in several cases, they have a private equity investor, which ensures high corporate governance standards. So, the issue boils down to the second factor, that is price," said Prithvi Haldea, chairman of Prime Database Group, a primary market tracker.
The current environment is not suited for aggressive valuations, Haldea said.
According to an investment banker advising a few companies on their IPOs, a lot of companies had filed their draft documents with a different valuation than where the markets stand today and that is a challenge in getting deals done.
“A lot of people who had filed prior to the meltdown in the mid-cap and small-cap segments, the valuations were pegged very different from where the market is today. Promoter expectations won’t climb down so quickly. For example, a promoter today will not look at his business as 30% less valuable than what it was three months ago. Several transactions are stuck because of this issue," he said, speaking on the condition of anonymity, as he is not authorized to speak to the media.
The pressure on valuations has affected several transactions. Last month, The Economic Times reported that India’s largest renewable energy company ReNew Power Ventures is likely to defer its IPO after investors demonstrated lukewarm interest in the aggressive valuation the company was proposing.
Several seafood exporters such as Devi Sea Foods Ltd, Nekkanti Sea Foods Ltd and Sandhya Marines Ltd have filed their draft IPO documents with the regulator and are looking to collectively raise around ₹ 2,100-2,200 crore.
Haldea of Prime Database added that given the market conditions, buyers have stronger bargaining power, especially domestic institutional investors.
“With domestic institutional investors having become stronger by the day, they are able to take a strong call on pricing. Mutual funds, insurance companies they have become important and it is important to garner their support to ensure a successful deal. So, there is huge amount of hard bargaining taking place in terms of pricing," said Haldea.
If the promoter is not comfortable with a particular price then he will defer the issuance, he added.
The supply side of IPO deals, however, continues to see healthy activity. At least 22 companies have filed their draft prospectus in the last two months and are waiting for Sebi approval.
“There is a bit of a recovery lately in the market and the impact of mutual fund portfolio rebalancing has started to settle down. Whenever the market shows signs of secular upward trend, companies will rush to launch the deals. We might see some bunching up of deals in September-October period," another investment banker said on the condition of anonymity.
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