Valuation tussle delaying IPO plans
Firms with IPO permits not entering market as it is not willing to give them the valuation they want, say analysts
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Mumbai: The queue of companies looking to go public is growing longer, but many of the share sales are getting stuck because of a tussle between promoters and private equity (PE) investors, who are trying to seek the highest possible valuation, and institutional investors, who are becoming more cautious given the volatile secondary market.
The tussle is delaying the launch of some of these initial public offerings (IPOs). In other cases, firms have had to refile their IPO papers after negative feedback from investors.
AGS Transact Technologies (a share sale of around Rs.1,350 crore) and L&T Infotech (approximately Rs.1,500 crore) have both been advised by their bankers to lower their valuation expectations, said several bankers involved in the deals. Another firm, Matrix Cellular (International) Services Ltd also finds itself in a similar situation, they added.
L&T and Matrix declined comment.
SSIPL Retail was forced to refile its draft IPO papers with the Securities and Exchange Board of India (Sebi) following investor feedback during roadshows. The company’s new filing brings down its valuation by almost 20% to Rs.800 crore, according to two people aware of the development. SSIPL did not respond to an email seeking comment.
Experts say volatile markets do not augur well for firms seeking to list at aggressive valuations.
So far this calendar year, the benchmark Sensex is down 6%; in 2014, the index rose 29.89%. Foreign institutional investors have sold a net of Rs.14,212 crore in Indian equities since 1 April. “The valuation that investors will be willing to give in an uncertain or volatile market will be lower than what they would give in a buoyant market,” said Prithvi Haldea, chairman of Prime Database Group, a primary market data tracker, adding that “we are still far away from an IPO frenzy where everything sells”.
So far this year, 18 firms have raised around Rs.11,000 crore through IPOs. This remains well below years such as 2007 and 2010 when Rs.34,179.1 crore and Rs.37,534.6 crore, respectively, was raised via IPOs, according to data from Prime Database.
Haldea adds that several firms are holding IPO approvals, but are not entering the market because it is not willing to give them the valuation they want.
Part of the blame lies with bankers, who are pitching aggressively to bag some of these issues.
“The price at which the banks pitch is very different from the final price at which the deal goes through. This is because there is cut-throat competition among banks to get these mandates, and they are willing to make the pitch at a higher price, even if they might have doubts about the IPO going through at that price,” said a banker, who is also involved in one of the IPOs and spoke on condition of anonymity.
The problem also lies with promoters and PE investors in firms looking to go public who are pushing for high valuations. Promoters, by nature, rarely like to compromise on valuations, while PE investors are trying to maximize returns on their investments.
According to Arun Kejriwal, founder of brokerage firm Kejriwal Research and Investments Services Pvt. Ltd, the higher valuations being sought in this cycle are also a consequence of the weaker rupee, which has eroded returns for most PE investors.
Investors who pumped in money in 2008-09 (the rupee traded at an average of 43.39 per dollar in 2008) are at a disadvantage since the currency has now weakened. The Indian currency traded at an average of 63.72 per dollar this year.
“Where PE firms are involved, they need to exit at a profit. They will not be willing to take a lower valuation and would rather wait for the markets to improve. So, wherever PE funds are involved, there the problem of valuation becomes more acute,” said Haldea of Prime Database.
AGS Transact Technologies, the payments solutions provider backed by PE firm TPG Capital, discontinued its roadshows in August due to investor apprehension over the valuation of Rs.4,000 crore being sought by the promoter and the PE investors, according to two people aware of the development.
“The financial performance of the firm in the June quarter was below what it had committed to investors,” said one of the two. The firm now plans to go to investors with its December quarter numbers, which are expected to be stronger, and seek a valuation as close to the one expected earlier, he said, adding that the IPO is expected around February next year.
“The company has seen strong investor interest in its proposed initial public offering during its roadshows,” AGS said in an email response, without specifically responding to the questions on valuation and discontinuation of its roadshows.
Matrix Cellular, where PE fund CX Partners is an investor, is also facing pressure from investors as its financial performance has also been below the commitments made to investors.
At L&T Infotech, too, the bankers are advising the company to tone down valuation expectations.
“Larsen and Toubro (L&T), the parent firm, which is divesting its stake, is seeking a higher valuation than what investors are comfortable with as of now, citing the brand value of the parent firm and the P-E (price-to-earnings) multiples top firms in the IT services sector are enjoying on the public markets,” said a person aware of the development.
Experts and bankers believe some IPO approvals may lapse due to such valuation concerns, as firms would rather wait for markets to improve than dilute equity at a lower valuation.
So far in 2015, 15 firms have received Sebi approval for their IPOs, but are yet to launch them. Of these, nine firms received their approvals in the first six months of the year.