COMATOSE IPO MARKET - WHO KILLED THIS GOLDEN GOOSE?
By Ruma Dubey
Two, actually, three major developments in IPO market – not just in India but globally.
The first event is to do with India. An SME IPO, Loha Ispaat, which one say was more foolhardy than courageous had launched its IPO, which opened on 11th March 2014 and was to close on 20th March. But due to poor response the issue had to be called off as the offer has not been fully subscribed. It received bids for 2.08 crore shares against 2.67 crore shares offered. And this was despite the company extending the closing day of the issue by five days and also scaling down the price band to Rs.74-77 from the earlier range of Rs.77-80 a share.
Then yesterday America saw the IPO of the popular "Candy Crush Saga' videogame flopping very badly. It priced its much anticipated public offering at $22.50, in the middle of its expected range. the maker of this game, King Digital, which debuted yesterday, fell almost 16% and closed at $19. Analysts there called this disastrous debut as a result of ‘extremely fast money’ which is basically investors making a fast exit on the listing day itself. This, many say, is because the IPO was priced too high, leaving very little room for any gains. Many now say that if the IPO had been placed at a discount, maybe, the stock would not have tanked like this after listing.
And the third event, is yet to occur but is being awaited eagerly. This is the IPO of Alibaba, a Chinese e-commerce giant, which is touted to be the biggest IPO since Facebook’s $16 billion IPO in 2012. The Alibaba is rumored to have picked the NYSE for its IPO and the size of the IPO is rumored to be as large as $16 billion or more. The IPO is expected to be filed sometime in April and no one expects it to be cheap.
Another Chinese internet company Sina’s Weibo microblog unit has filed plans for a possible share sale in the US; this is something like the Chinese version of Twitter and it plans to raise $500 million. Another Chinese online retailing giant, JD.com, filed in January for a U.S. stock listing.
Based on this, we can conclude two things– the Chinese companies are invading the US stock exchanges in a big way and that is leading to a virtual boom in the American primary markets. And on the other hand, it has been proven that expensive IPOs will tank, be it in India or abroad, irrespective of its pedigree. Also, more importantly, what we know is that the Indian IPO market in dead!
Well for beginners, this whole of 2014, there has not been a single IPO (baring this SME issue) and thus fund raising via IPOs is at an 11-year low! Companies are simply not having the courage today to launch their IPOs, despite secondary markets booming and having got all the clearances from SEBI for their IPOs.
Recently, the DTH television arm of Viedocon- Bharat Business Channel failed to launch its IPO, allowing its deadline to lapse. Ditto for Calyx Chemicals & Pharmaceuticals, which also failed to launch its Rs.180-crore issue before its January 17 deadline. Others who allowed their deadlines to lapse rather than go for the IPO were Rashtriya Ispat Nigam, ACB India, IFCI Factors, Vishwanath Sugar & Steel and PME Power Solutions India.
Another company, waiting to launch is regional cable television service provider Ortel Communications. It has chalked out a Rs.1000 crore issue, one of the biggest in recent times. Its deadline will lapse on June 26th.
So isn’t this an anomaly – the secondary market is making new lifetime highs but yet, IPOs are not being launched. So what exactly is wrong? Simple answer – retail investors simply do not have the appetite for IPOs, in fact retail investors have all but disappeared. The bigwigs have a serious issue of confidence and that is keeping them away.
But the real culprit who actually killed the IPO market is the pricing. That singularly eroded investor profits and thus the confidence. Every issue which comes out today, firstly has questionable fundamentals and yet, the pricing of the IPO is sky high. Valuations are so expensive that it is become almost a losing proposition to invest in IPOs. After the high price of the IPOs there is virtually no gain left on the table for the investors. It is more prudent to buy the stock after it has got listed as very soon, after listing, many PE funds and big names investors make an exit, bringing down the price. Yes, PE funds and bigwig investors have become mere props to lure investors to the IPO and they in turn make a quick buck, leaving the rest holding a bag full of losses.
It would be wrong to say that retail investors have lost all appetite for IPOs. Price a good issue right and sure enough, investors will flock. Take the example of L&T Finance. It came out with its IPO priced at Rs.52. Given its lineage, brand equity and fundamentals, it could have priced it anywhere and people would have still paid. Yet it chose to be truly investor friendly and priced its issue in such a way that today all are in profits. Now that is what we call integrity. How many such promoters do we come across who do not get carried away by greed?
Remember the issue of Infosys? It came way back in 1993 and shares were issued at Rs.95/share. Today even when it is not exactly at its best, it is at over Rs.2000/share. HDFC Bank came out with an IPO in 1995 and it was priced at par, at an unbelievable Rs.10/share. It was oversubscribed 55 times! Yes, these were all issues way back when inflation and cost of living was not so high. But then are the issues of today priced right; aren’ t they way ahead of the inflation? In fact they are adding on to the cost, raising the bar of inflation further.
People today have the money but nowhere to invest; or rather no genuinely affordable, value-for-money avenues to invest. Companies can truly build a strong investor base, that too loyal, if issues are priced at much lower levels, allowing people to make some money. This trend of pricing issues so high is what has culled the primary market; the promoters and lead managers to the issue have killed the goose which laid the golden eggs. But we are the losers in this battle of greed and avarice.
If issues are priced really low, primary markets will boom. Sadly, the promoters do not seem to understand this simple logic…..or they understand but simply do not care.