The withdrawal of two high-profile IPOs on poor investor response and the tepid listing of the Reliance Power stock underline how transient the recent euphoric conditions in the primary market really were. These events probably signal a decisive shift in the way Initial Public Offerings (IPOs) will be priced, evaluated and purchased in the months ahead.
Consider the facts. In three short weeks, IPOs have gone from being subscribed several times over to a state where some of them are unable to scrounge up even the minimum required bids. Investors have gone from taking leveraged bets on offers to withdrawing their bids at the last minute. The Emaar MGF and Wockhardt Hospitals offers were no doubt aggressively priced and carried high execution risks. However, such factors hardly deterred investors — individual and institutional — from giving the thumbs up to equally risky IPOs barely a couple of weeks ago. Euphoria about IPOs reached a crescendo just before this meltdown. Companies seeking funds from the primary market were pricing their businesses at a huge premium to listed peers; fancy valuations were demanded for businesses that were still on the drawing board and ‘grey’ market premia for IPOs were so widely publicised that one could have mistaken them for stock market quotations! Hopefully, the failed offers and dwindling listing gains will induce investors to treat such hype with more scepticism. From the issuers’ standpoint this may lead to quality offers being priced more realistically. Companies with a negligible track record, which should ideally be seeking venture capital rather than retail funds for their business ideas, may be forced to rethink their IPO plans. Over the medium term, all this may make the primary market less attractive to speculators and help it attract more serious investors looking to participate in the long-term growth prospects of a business. However, this does not rule out more pain in the near term. Unbridled optimism in the stock market usually gives way to extreme pessimism and recent events may well end up choking off IPO funds even for quality businesses in the immediate days ahead. In this context, the response to forthcoming IPOs from issuers such as Rural Electrification Corporation needs to be keenly watched.
For investors, the events of the past week indicate a need to reframe their IPO strategy. They should go back to evaluating offers on business fundamentals rather than on the potential for listing gains. Investors should also evaluate the opportunity cost involved in tying up funds with an IPO, at a time when attractive investment opportunities may be available in the secondary market. This apart, the poor response from the institutional investors to these IPOs suggests that institutions, both domestic and foreign, may be developing an increasing aversion to risk, even if the “growth story” is peddled from a sought-after market such as India. This may well indicate that the market as a whole may now be unwilling to pay an exorbitant price for growth, whether it is for already listed businesses or companies taking the IPO route. Caution may be the watchword.
Source: Business Line dated 12-02-08