Primary market faces its longest drought

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Only 1,619 crore raised in nine months, no fresh paper in sight for investors

Primary market faces its longest drought
India’s initial public offering (IPO) market is going through its driest patch in years as no IPO is scheduled in the near future even eight months after the last IPO — by Just Dial — hit the market in June.

Previous such long gaps came in December 2012, when Tara Jewels’ IPO hit the primary market five months after VKS Projects initial share sales in July 2012. Another dry patch cropped up between November 2011 and April 2012 between the IPOs of Indo Thai Securities (November 2011) to MCX (February 2012). But the current drought seems to be the longest.

Analysts said the subdued secondary market and past IPOs trading at a big discount have contributed to the lean phase. Firms and their investment bankers are deciding to postpone IPOs fearing investor apathy, they said.

A study by Securities and Exchange Board of India (Sebi) showed, if an investor put in Rs 100 each in 52 IPOs during 2010-11, they would be sitting on just Rs 2,898 worth shares, indicating a net loss of 55 per cent of his/her investments.

Starting 1 April 2009, Rs 71,200 crore worth public share offerings have been allowed to lapse or be withdrawn till date, Prime Database founder Prithvi Haldea pointed out recently.

“India has continued to struggle primarily due to its own domestic concerns. The Indian market has really not been IPO-friendly for the past three years due to a variety of factors. This includes overall poor sentiments, lack of investor appetite, secondary market volatility, promoters not getting the valuations they think they deserve, apprehensions of regulator’s views on valuations and lack of appetite for equity of big-time issuers from the infrastructure sector, especially power, telecom and real estate. In addition, the government has also been unable to push through its divestment programme,” said Pranav Haldea, MD of Prime Database, which tracks the fund raising in Indian market.

Through calendar 2013, only Rs 1,619 crore was raised by way of initial share sales, compared with Rs 5,966 crore in 2011 and Rs 6,938 crore in 2012.

In the entire calendar year, there were only three main-board IPOs: Just Dial, Repco Home Finance and V-Mart Retail (leaving aside the 35 SME IPOs).

The sad part is that there is no IPO in sight either, though companies, such as Bombay Stock Exchange (BSE), are awaiting Sebi approval for their IPOs.

“With the continuing uncertainty on the political/economic front, and a volatile secondary market, a revival in the IPO market is not foreseen, at least in the immediate future. Primary market revival usually comes around six months after the secondary market has either seen stability or a bull run. The secondary market started to show signs of a pick up around five months ago after the new RBI governor took charge and the US Federal Reserve hinted at a postponement of its tapering policy. So, this shall be one thing to watch out for,” Haldea Jr told Financial Chronicle, in an email interview.

“Primary markets do well when the secondary market mood is bullish. We have subdued secondary market and the same sentiment is reflected in the IPO market,” Jagannadham Thunuguntla, chief strategist and head of research at SMC Global Securities, told this newspaper.

Another concern is investor appetite. initial public offerings (IPOs) hit the market when there is investor appetite. Investors, however, shall be sitting tight till the outcome of the general elections as also watching the pace of US Federal Reserve tapering, as it would influence liquidity in the market.

“I expect that IPO activity shall pick up in the second half of the calendar year, where there is expectation of a more sustained and wide rally in the secondary market on the back of a general improvement in macro fundamentals of the economy and a change in leadership as well as a stable government,” Haldea said.

“There is a lot of pent up demand as far as issuers are concerned. Numerous major companies are in dire need of equity injection. Slack demand and delays to major projects have severely affected several large industrial conglomerates this year, which could force their promoters to raise equity at what they consider poor valuations. Moreover, bank finance is also getting stretched with Basel III norms coming. “Thus, companies shall have to access capital markets. As per our database, 919 companies have made announcements of their initial public offerings intentions. As such, there is no shortage of supply and a huge pipeline of IPOs exists,” he said.

There are also hundreds of companies where PE firms or other institutional investors are looking at an exit. Lastly, the shape of the government’s disinvestments progra­mme in the remaining months of this fiscal will also determines the timing and success of the primary market’s renewal.

“However, IPO windows open and close very quickly. So one needs to be cautious before making any predictions. Any unexpected development can change the sentiment overnight. If the economy holds up, so will the stock markets, prompting private companies to look at share sales for raising monies,” he said.

2013 also saw two companies hitting the market and withdrawing their issues midway because of low demand. Sai Silks (Kalamandir) pulled out its issue in February, while Scotts Garments withdrew the issue last May.

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