India: Market gets unattractive for investors with surging IPO valuations

Photo: Reuters

Equity markets have corrected considerably in the past two months. But those in the primary market are acting as if the bull market is alive and kicking. The initial public offerings (IPOs) of ICICI Securities Ltd and Hindustan Aeronautics Ltd (HAL) failed to get enough bids to meet their targeted issue size, and experts have squarely blamed the rich valuations these companies were demanding.

The ICICI Securities issue fared the worst this month, receiving bids for only 88% of the total shares on offer. The pricing was steep, and failed to provide a buffer for investors in case markets fell during the book-building process, pointed out a merchant banker. As it turned out, markets fell late last week owing to heightened fears of a trade war between the US and China, and unsurprisingly, bids for Indian IPOs started to dry up.

IPOs in March have had a poor run so far. Graphic: Mint

Another expert on the primary markets said the brokerage business is cyclical and that it was foolhardy to price the issue at 30-times earnings just when the cycle had begun to turn south. He says that the euphoria in the primary markets isn’t limited to large companies, but is also visible in SME (small and medium enterprise) IPOs. These companies are demanding valuations of 20-25 times earnings, despite the bigger fall in small-cap stocks in the secondary markets. While the BSE 500 index has fallen 9% from its peak in January, the BSE SmallCap index has fallen 14.4%.

A similar trend has been evident in issuances by government-owned firms, where participation by investors has been the weakest. HAL, for instance, was a long-awaited IPO. But after the issue was priced far higher than what the company’s growth rates warranted, it got barely any bids other than from domestic financial institutions led by Life Insurance Corporation of India. Domestic institutional investors or DIIs (excluding domestic mutual funds) accounted for four-fifths of the total bids received, which helped the issue scrape through with a 99% overall subscription. For the two other public sector issuances this month, DIIs accounted for 54% of total bids received cumulatively.

A look at the table alongside shows that participation by high networth and retail investors has been dismal. While the recent correction in the secondary markets has hit sentiment, another reason is that the so-called listing pop has been missing in a significant number of IPOs lately.

In late 2017, when the government divested its stake in two general insurance companies, investors who bid found that they would have been far better off waiting until listing. The shares listed at a huge discount and continue to trade at a large discount to their issue price. From the looks of it, retail investors have taken home the lesson that it’s best to wait until listing before buying shares of public sector units.

A clear outlier in all this is the Bandhan Bank issue, which received a large amount of bids in each investor category. Analysts say its IPO was an outlier simply because its financial metrics also make it an outlier, with high spreads and low non-performing assets. The bank’s shares listed at a 25% premium to its issue price, despite demanding a stiff valuation in the IPO itself.

The success of the Bandhan issue may tempt bankers and issuing companies to continue to demand high valuations even going forward. But hopefully, the under-subscription in the ICICI Securities and HAL IPOs should act as a wake-up call. As it is, FY18—a record year for IPOs—is ending with a bitter aftertaste.

Also Read:

India: ICICI Securities cut IPO size to nearly $542m owing to weak subscription

India: Market volatility to affect IPO valuations of small, mid-sized firms

This article was first published on Livemint.com

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.