Primary market stumbles to a halt4 min read . Updated: 24 Nov 2011, 12:03 AM IST
Primary market stumbles to a halt
Primary market stumbles to a halt
Mumbai: It’s not just the stock market that’s feeling the heat as risk-averse investors dump shares and flee to safety. The primary market for initial public offerings (IPOs), too, has gone into a coma as the year draws to a close and isn’t likely to stir any time soon, analysts say.
The amount raised in 2011 from IPOs is the lowest in seven years by companies in the world’s fastest-growing major economy after China. The country’s share of the emerging markets IPO pie has declined to 1.7% this year from 5.6% in 2010.
The sharp fall in aggregate IPO deal value puts India, a $1.7 trillion economy, behind even the tiny gambling resort of Macau, a Chinese special administrative region. Companies in Macau, which has a gross domestic product of just $21 billion, have managed to raise $1.6 billion through new share offerings this year.
As global economic uncertainties such as the euro zone debt crisis persist, domestic growth slows and corporate earnings and investments decline, pulling the stock market and the rupee lower, the 2012 outlook for IPOs looks weak, analysts say. They expect the lull in the primary market for new share sales to stretch at least into the first few months of the next year.
India’s primary market has fallen from its once proud position second position last year to rank 10 in 2011. Mint’s Vyas Mohan tells you why
Companies have a year’s time to raise money through IPOs after filing a draft prospectus with the Securities and Exchange Board of India (Sebi), the capital market regulator. There has been a 37% decline in the number of new IPO filings to 81 in 2011.
Sovereign debt problems in the euro zone and the US have increased investor risk aversion and hit markets across the globe. Indian markets have fared worse than other emerging markets, which have also felt the heat.
Also See | Dry Spell (PDF)
Rising interest rates to douse inflation that’s still near double digits and an unprecedented fall in the rupee, which has dropped 17% against the dollar from its year’s high in July, has led the Sensex, India’s benchmark equity index, to slump 33% in dollar terms so far this year, making it the worst performer in Asia. In comparison, the MSCI Emerging Markets Index has fallen 21% over the same period.
The slump in the secondary market—considered the lead indicator for the primary market—and the poor performance of previous IPOs have lowered investor appetite for new share sales.
“At a time when flows in the secondary market have dried up, it is difficult for primary markets to attract money," said Sadanand Shetty, head of equities at Taurus Asset Management Co. Ltd, which managed assets worth ₹ 5,367 crore as of September. “Indian markets have been weaker than others and companies have delayed expansion plans, leading to a weak primary market."
Foreign institutional investors have invested roughly $300 million in the Indian stock market so far this year after pumping in a record $29 billion last year, nearly one-third of which had been primary market investments, according to analyst estimates.
Qualified institutional placements (QIPs)—sales of shares and other securities convertible into equity to institutional investors—have also dried up. QIP deal value has declined 86% to $741 million so far this year. Capital raised through follow-on public offers, or share sales by already listed companies, have also declined by half, but is still the third highest among emerging markets at $7.6 billion.
Companies are looking more at debt than equity to raise capital given the lacklustre stock markets, but if interest rates move up further, even debt deals may be affected, said Vinay Menon, head of equity capital markets at JP Morgan India Pvt. Ltd.
Prithvi Haldea, chairman of Prime Database and a member of Sebi’s primary market advisory committee, said the decline in primary market offerings is mainly due to the weak state of the economy and falling corporate performance. Prime Database provides information on capital market offerings.
Economic growth in the current fiscal is expected to fall below 8% from 8.5% in the last fiscal. Corporate earnings in the broader market fell 39% in the September quarter, the worst in half a decade. The consensus one-year forward earnings estimate of Sensex companies has dropped 7% to ₹ 1,159 per share since the start of the fiscal.
New share offerings in the previous years have not managed to generate decent returns and that has disappointed investors, said Shetty of Taurus Asset Management. The BSE IPO index that tracks the performance of newly listed firms has declined 15.7% in the past two years, 11 percentage points more than the drop in the BSE-500 index.
The BSE IPO index had fallen 29.2% this year till Tuesday.
Among companies that sold shares this year, Muthoot Finance Ltd is down 4% from its issue price, Shekhawati Poly-Yarn Ltd has declined 17.5% and Sanghvi Forging and Engineering Ltd slumped 72.94%. Lovable Lingerie Ltd has been a rare bright spark with a 56.59% gain above its issue price.
“Investors are increasingly getting choosy about the companies they invest in," said Menon. “There will be enough investors for quality companies."
The government’s inability to go ahead with its ₹ 40,000 crore divestment programme has also hit the market for new offerings. So far this fiscal, the government has raised only ₹ 1,144.5 crore, or 3% of its divestment target, through stake sales in state-owned companies.
Most analysts say the first few months of 2012 are likely to see a weak primary market as the economy slows and business sentiment remains soft.
“The secondary market has to pick up first. Only then will investors take interest in new shares," said Haldea.
With inflation and interest rates remaining high and economic indicators such as the fiscal deficit far worse than in 2008, equity markets have quite a grind ahead before they recover, Shetty said.
Ashwin Ramarathinam contributed to this story.
Graphics by Ahmed Raza Khan/Mint