Stock Market: Blockbuster Buzz
Arecent IPO, Salasar Techno Engineering, a Ghaziabad-based steel solutions company, received overwhelming bids worth nearly Rs 10,000 crore, that is, 273 times more than its issue size of Rs 36 crore. This issue from the steel sector is not a relatively large issue, but the oversubscriptions still speak volumes for the craze that is going on in the IPO market.
Investors, both big and small, foreign and local are flocking to IPOs and seemingly lapping up everything on offer to make a quick buck and even to find new investing ideas. Sample this: in this calendar year, a total of 13 IPOs raised a tad over Rs 9,000 crore, but most were heavily oversubscribed because of the high retail and domestic investor interest.
Another recent Rs 524-crore public issue was oversubscribed a massive 173 times, which is to say it saw demand worth Rs 89,000 crore. The oversubscriptions surpassed the more popular IPO — Avenue Supermarts, the owners of DMart — suggesting that such oversubscriptions are now par for the course.
To be sure, investors are also making good returns from IPOs, and that has been acting like a virtuous circle. All but three out of the 12 IPOs made listing gains for investors. Some like Avenue Supermarts doubled on listing. Others like the recently listed Central Depository Services or CDSL and AU Small Finance Bank listed at huge premiums of 46 and 67 per cent, respectively in the market. 
But investors seemed to have got very little allotment of these new IPOs since prices of these stocks are still rising in the secondary market. In fact, the CDSL stock shot up like a rocket and, in just a few weeks, delivered returns of 167 per cent to its IPO investors. Bengaluru-based Shankara Building Products, another recent retailer of building products, doubled in value and is the third best performing IPO in current gains in 2016.
Such sterling returns no doubt has perked up investor interest. Small investors are rolling IPO proceeds from one issue to another — booking listing gains and reinvesting the proceeds in the next IPO. Of course, much of the allotment depends upon a lottery system as the high oversubscription figures means that only a lucky few will get an allotment. These IPO allotments are making animated coffee table and social media discussions.
Boosting Demand
So what gives? Experts point out to the surge of liquidity in the system that is driving more small and big investors to dabble in the equity market. For some new investors, the testing ground and the first step to the equity market is through the IPO market, which is why the retail category is seeing good subscriptions.
Says S. Subramanian, MD, Axis Capital, “There is enough liquidity flows, which are coming into the equity markets, and there aren’t many good ideas. Small- and mid-caps are extremely expensive, so IPOs get hugely subscribed. And because investors don’t get their allocations in the IPO market to the extent they want, they buy in the post-IPO stage.”
It is the institutional and high networth investors (HNIs) who don’t receive enough allocations during the IPO stage who end up bidding for more shares post listing. This results in a frenzied buying post listing. In June, several issues such as AU Financiers, CDSL and Tejas Networks zoomed, as large investors were known to be purchasing more stocks. Eventually, as the demand got satiated, interest in these stocks stabilised.
In fact, this year DMart has been instrumental in rekindling the animal spirits in IPO investors. The stock doubled on listing and tripled in value over the last few months inspiring many new investors to dabble in the IPO market. The DMart IPO came out in early March 2017.
It is also a fact that some of the IPOs that have been hitting the markets have no peers, or have unique business models. CDSL, for instance, is the only depository in the world that is listed leading to more demand from investors looking for niche businesses to invest their monies.
In addition, some of these companies have a strong track record of performance and profit growth. In many cases, private equity players had participated in earlier rounds of investments in some of these IPOs, which ultimately helped boost investor confidence.
“The quality of companies entering the market in this phase is far superior to any of the issues in the past,” says Prithvi Haldea, founder and CEO, Prime Database. “Companies have a solid track record and there is comfort in terms of due diligence. If you have all these, then obviously the response is very good,” says Haldea.
The Pricing Game
IPOs are also being priced reasonably leaving some room on the table for investors to make listing gains. Domestic institutions are participating in the IPO market and trying to bring down prices to a reasonable level. Says Haldea: “IPO is a bit saner as there is an involvement of domestic institutions. If you get a good company at a reasonable price, it is the best combination you can have as an investor. A good company at a bad price makes a bad investment.”
Merchant bankers on their part are also bringing good issues to the market and leaving some on the table for investors, though the post-issue demand is another story. “We want to price it so that investors get about 20-25 per cent upside, we don’t necessarily price it so that investors are making 100 per cent upside,” says Subramanian.
Retail investors are now allowed to bid only up to Rs 2 lakh per application. But a new rule allows for allotment of even one lot to all eligible retail investors. Hence, lately there has been a scramble as a large number of investors are making IPO applications in multiple accounts for the minimum lot. This means that a lot more investors get a chance to grab a slice of the IPO market. Hence, most retail IPO bids are for applications worth Rs 15,000.
A change from the past is that there are no big rushes from promoters to cash in on the IPO market, and only the known companies with a reasonable track record are coming into the market. Sebi’s rules of track record has cleaned some of the froth in the IPO market. Sebi has laid down a criteria of a three-year track record of profitability for companies, which means that only the serious players will come into the IPO market. “This is no longer a venture capital IPO market, this is a seasoned offering IPO market,” says Haldea.
Investors still looking to put their money in the IPO market could look forward to some interesting names with good track records. However, as the stockmarkets are rising, valuations of existing listed companies are getting repriced higher. This could drive up the pricing of new IPOs because IPOs begin to be benchmarked against existing listed peers, which are trading at higher prices. That is something you don’t want to see happen as an IPO investor. “In case the secondary market continues to run up, future IPOs may get overpriced as they have to be benchmarked to the peers in the market quoting at higher prices,” says Haldea. This would mean, investors would not get good companies at great prices. And for a vibrant IPO market to sustain, good IPO pricing remains its biggest bugbear.
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