IPOs feel the heat

Initial public offerings face collateral damage from market meltdown

IPOs feel the heat
IPOs feel the heat

The market meltdown is spilling over to the primary market. The great Indian IPO rush has stalled and companies which had been readying their initial public offerings would now have to either defer their issues or take a price cut to see their offerings through.

The lull in the IPO market would also hinder the government’s disinvestments target and upset its fiscal math.

The liquidity fears that started from mid-September and the consequent downturn in benchmark indices—which had until then managed to hide the market-wide value destruction—have made investors nervous and extremely cautious, leading to IPOs receiving muted response in the market.

In the process, without making much headlines, a public issue has devolved. The IPO of Dinesh Engineers was withdrawn as the issue was subscribed only 17 per cent at the close of the issue on October 3, forcing merchant bankers to refund the money to the applicants.

The IPO of government-owned company, Garden Reach Shipbuilders & Engineers, drew weak response from investors and the company was forced to extend its IPO by three days to October 1 and also cut the price band to  Rs 114- Rs 118 against the original price band of Rs 115-Rs 118 a share.

The Rs 345-crore public issue managed to sail through with 1.02 times subscription on the last day of the extended closing by October 1, mainly on the back of orders placed by qualified institutional investors.

Of the 24 IPOs that hit the market in 2018 year-to-date on the main board of BSE and NSE, 22 have been listed while two are yet to be listed (Garden Reach Ship Builders & Engineers and Aavas Financiers).

Among the 22 listed so far, 15 are trading below their issue price as the market crash has taken a toll on their share prices, too.

Those that had enjoyed high listing premiums too have seen huge price erosion, and the worst hit include high-profile names like HDFC Asset Management Company, as it is down from its all-time high price of Rs 1,969.50 to Rs 1,294.15, after touching a 52-week low of Rs 1,248.30.

The HDFC AMC public offer was allotted at Rs 1,100 a share and had listed at 58 per cent premium to the issue price.

Similarly, Bandhan Bank which had hit an all time high of Rs 741.80, is down to Rs 458 a share, below its listing price of Rs 499. Bandhan Bank had listed at a huge premium of 33 per cent over its issue price of Rs 375.

The listing of Garden Reach Shipbuilders & Engineers and Aavas Financiers are scheduled for this week but their investors face uncertainty over the fate of their investment.

Aavas Financiers’ Rs 1,701-crore IPO was subscribed 97 per cent on last day on September 27, largely on the back of institutional investors subscribing 2.77 times shares available for allocation.

However, sources close to the merchant bankers are hopeful of a successful listing of Aavas Financiers.

Aavas, earlier known as AU Housing Finance, was the mortgage lending business of Jaipur-based small finance bank AU Small Finance Bank. In February 2016, Partners Group and Kedaara Capital acquired the company for  Rs 1,000 crore.

Though housing finance companies (HFCs) have taken a beating on the stock market after the September market crash, experts believe that in terms of asset quality, a majority of HFCs are better placed than some of the troubled banks, which are grappling with the non-performing assets (NPAs) problem.

Housing finance companies lend with tangible collateral and their NPAs are much lower than most of the banks, they say. As equity market bull run extended into this financial year, around 60 companies had filed their draft offer document with market regulator Securities and Exchange Board of India since April 1, and are awaiting the Sebi nod for going public.

Some experts some respite to the primary market could be possible once Pitru Paksh/Shradh period, which started on September 24, comes to an end on Monday, October 8, as it is a period when the Hindus do not initiate new business activity. But, the fasting period of Navratri that starts from October 9 and ends on October 18 will again be a period of festivities in large parts of India, and new business activities would take a back seat during this period.

Some primary market action is expected during the period between October 19 and November 6 just before Diwali, and again the Diwali celebration period of November 6 to November 15 will be a phase of festivities in the stock market, with low-key business activities, in the primary market, too.

Going forward, the future performance of the secondary market and the second quarter corporate earnings would largely decide the course for the primary market.

Not just equity offerings, new fund offers (NFOs) from mutual funds too have suffered from the market downturn. Data compiled by Morningstar India shows in the 33 equity-oriented new fund offers this year, cumulative returns were positive for 18 NFOs and negative for 15 NFOs. Moreover, NFO returns is expected to turn negative this year, with the stunning market decline in the last two sessions of the previous week.

The market meltdown is going to impact the government’s big ticket disinvestment programme. The government, after setting an ambitious target of Rs 80,000 crore for FY18-19, was looking to attain this target by the close of the third quarter of the fiscal year. Last year, the government had exceeded the selloff target, by mopping up over Rs 1 lakh crore through various modes.

On the bright side, the muted IPO market also offers retail investors and long-term investors an opportunity to acquire shares at reasonable or discounted valuations in whatever IPOs that may come in the remaining part of the year.