Saturday, February 27, 2010

Relax! It ain’t a giant wave, not yet!

With two IPOs hitting its shores one can finally see some sign of life in the primary market again. But is the market really ready? manish k. pandey acts investor... oops investigator!

At least 50,000 retail investors applied for shares when Mahindra Holidays & Resorts came out with its initial public offering (IPO) in June this year, while the much awaited Adani Power IPO, which closed last week, received a whopping 5,79,000 applications (the Rs.30 billion IPO attracted total bids to the tune of Rs.650 billion). So the entire IPO ecosystem is buzzing with energy and enthusiasm yet again. Investors are seeing this as a chance to party again after a prolonged sobering period.

But then, is the market really ready for the next big wave of IPOs considering that the retail investor is still sceptical to investing in IPOs after the failure of Reliance Power IPO? “Capital markets have short memories. They have the habit of forgiving and forgetting the losses quickly as soon as they start making money again. Investor response to the Adani Power IPO is a case in the point after the fiasco of Reliance Power IPO. Certainly, investors are back into the IPO arena and it’s business-as-usual for them,” reasons Jagannadham Thunuguntla, CEO and Equity Head, SMC Capitals.

Further, the participation of retail investors in an IPO depends primarily upon two factors. Firstly, on the valuations at which the IPO is being made available to investors and secondly, on the state of the market at the time of the IPO (which has a bearing on investor sentiments). If these two factors are in favour, there is little doubt about the success of an IPO. But are these two factors really in favour of the investor as of today? “I believe that the market is ready for quality IPOs. With the return of the risk appetite amongst the investor community at large, there is certainly a demand for newer IPOs. However, to ensure that investor appetite remains unaffected, it’s important that these IPOs are not bunched together within a short span of time,” cautions Hitesh Agrawal, Head – Research, Angel Broking.

But, despite the optimistic signs in the fund raising environment, there is a looming tsunami that threatens any momentum: the Budget has projected a deficit of 6.8% of GDP in fiscal 2009-10 and to finance this, the government will borrow about $80 billion from the market, which may further squeeze out the private sector, directly impacting their fund raising capabilities (Knowledge@Wharton). This statement certainly supports the contrarians who believe that the market still has a long way to go before it can finally take on to the IPO rush. “In reality, there is no rush of IPOs. It’s only media hype. Despite the secondary market being on an upward trend since March this year, we have had only 4 IPOs/FPOs raising Rs.4.43 billion. There was a huge expectation that this Budget would set the right tone for the secondary market, a prerequisite for the primary market. But, the immediate market reaction has shown that it is not very impressed,” avers Prithvi Haldea, Founder and CMD, Prime Database.

Certainly, a sense of stability in the secondary market is critical for IPOs to happen. This is because, one, when the appetite for listed stocks is also minimal, to expect new issues to find favour is hard and second, an issuer has to take a call of a stable market at least 30 days ahead (the time it requires to open and list an IPO). Since this stability or continued buoyancy is still not being seen, IPOs are not happening. In fact, as many as 17 companies are holding SEBI approval (typically the last hurdle in the launch of an IPO) for months now to raise Rs.69 billion, but are not daring to enter the market. “So at best, the next 3-4 months can see only 34 companies (holding and awaiting approval) hit the market,” says Haldea. Raison d’être: Issuers are finding the future outlook uncertain.

This can be seen by the fact that despite nearly 700 companies wanting to do an IPO, just four companies have filed their offer documents with SEBI since April this year. This certainly points out in the direction that the market is not yet ready for another big wave of IPOs.
For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2009

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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