During the last ten days we had a unique situation in the Indian IPO markets. We had three back to back high profile IPO’s one after the other. All these issues were in a hurry to complete their offerings before overseas investors left on their annual Christmas and New Year holidays.
First of the block was a power generating company, JSW Energy Limited which opened on Monday the 7th of December and closed on Wednesday the 9th of December. The issue was for Rs 2700 crs and was in a price band of Rs 100 to Rs 115 with a discount of Rs 5 per share for retail investors.
The second issue was Godrej Properties Limited, a real estate developer with a unique model where he does not invest in buying land banks but enters into joint development of real estate with a land owner. The issue opened on Wednesday the 9th of December and closed on Friday the 11th of December. The price band was Rs 490 to Rs 530 and the issue was to raise between Rs 462 crs and Rs 500 crs.
The third issue was from DB Corp Limited a publishing or media company, the publishers of Dainik Bhaskar. The issue opened on Friday the 11th of December and closed on Tuesday the 15th of December 2009. The price band was Rs 185 to Rs 212, and the issue was to raise between Rs 336 crs and Rs 383 crs.
The issues which were high profile in nature and were expected to impact the primary markets significantly going forward.
The three issues fared differently and impacted the markets in a different manner.
JSW Energy Limited.
This was the fourth issue from a power generating company after Adani Power, NHPC and Indiabulls Power. The response to the earlier issues in the case of Adani Power and NHPC was extremely positive. It may be mentioned that QIB subscription in Adani Power and NHPC was good and very well received. HNI response to NHPC was unprecedented in recent times and was over-subscribed close to 57 times. Retail subscription was also good and considering the size of issues was more than adequately oversubscribed. In the case of Indiabulls Power, it received even better response than Adani Power and NHPC in the QIB category, but was not well received in the remaining categories.
The common link between all the three issues was the post listing syndrome where the stocks tanked and are trading at a substantial discount to their issue prices. In this background market participants expected JSW Energy to be reasonably priced considering the adverse sentiment that Power generating companies had. However when the price band was announced, the pricing was as aggressive as any other power issue, and this made investors once again wary of the power generating new issues. The response was most uninspiring from all quarters and if some sort of a bailout by LIC and ICICI was not done it would have turned out be a real disaster. The company and its promoters are well established people. The company had a 1000 MW in operation and the remaining 2150 MW approximately would be in operation in the next 18 to 24 months. Here was a profit making company in a great business, and everything in place for it to b a great issue. There was one missing element the over aggressive price and a great issue became an also ran issue. The issue was just about subscribed and had to be priced at the bottom end of the price range of Rs 100 to Rs 115. The issue price fixed was Rs 100 for all and Rs 95 for retail. Irrespective of what happens on listing to this share, other power generating companies coming to the markets in 2010 will face negative investor sentiment to this sector.
The second issue was from Godrej Properties Limited. The issue was from a real estate developer with a unique business model. The issue was well received and was oversubscribed in the institutional category by about 7.45 times. It remained under subscribed in the retail and HNI category and was finally subscribed 4 times. The issue was priced at the lower end of the price band at Rs 490. End of the day, people found the issue expensive and hardly anything on the table for investors.
The third issue was from DB Corp Limited, a publishing company with three newspapers under its belt. They are Dainik Bhaskar, Divya Bhaskar and Business Bhaskar. They have a presence in 11 states and have 48 editions. A great deal of negative publicity in competing newspapers pushed DB Corp to the top of mind recall of investors. What happened on the last day of subscription is probably recent history. The share issue received unprecedented response across segments. The issue was subscribed a record 68.5 times by QIB’s, 26 times by HNI’s and 3.4 times by retail. The overall subscription was 39.5 times making this probably the best received IPO in 2009.
The idea of repeating the facts and trying to analyse what happened in these three back to back issues in a total working duration of a mere seven days is to understand what happened and learn for the future. It appears the IPO pipeline is huge and we will have a large number of issues in the next few months. The government of India is also planning a few issues and they should be happening in the next few months with NTPC probably happening as early as January 2010.
Pricing is a key factor and this has been proved without any doubts in these three issues. While the over expensive and aggressive pricing saw JSW Energy just scrape through, we saw Godrej Properties receive adequate response from QIB’s at the lower price band. DB Corp, interest just exploded simply because the first two issues had no support and then the third also got the effect of pent up demand.
Secondly it is of paramount importance to explain the business and the justification of pricing. Merely stating that it is based on feedback of overseas investors does not help because there are enough instances like in the case of Indiabulls Power, NHPC and Adani Power where even after huge support and subscription from QIB’s, the shares have simply tanked post listing. One wonders when there is so much of demand during the subscription period, when post listing the share is available 25% cheaper, why there is no follow up buying from those investors who have not been allotted in full.
Thirdly the Indian Investor is becoming more intelligent. Gone are the days when the presence of one merchant banker in the team of an issuing company automatically ensured full support and subscription. Today the retail investor is more aware and there are enough examples to prove in recent issues where even though the issue is over -priced retail stays away. In other cases if the company business is not understood or seems unclear, investors have simply stayed away. I believe with 30% to 35% of issue size to be allotted to this category in every issue, he deserves more attention than what is being given.
Finally sentiment is a key to stock market success. We all know what positive sentiments and negative sentiments can do to this market. The BSESENSEX was at 21000 in January 2008, at 8000 in October 2008, 12000 in March 2009 and 17000 currently. Ground reality and economic conditions have certainly not moved or changed to reflect this huge volatility. What has changed is sentiment. When the markets were booming people’s views on the economy were over exaggerated and they were overtly bullish on the economy and similarly at 8000 they were over pessimistic. This led to change in perception and hence the huge volatility.
2009 is drawing to a close and we are less than two weeks away from the start of 2010. Let us all hope that the community will learn to respect the retail investor, look at sentiment and above all remember that IPO is an invitation to share progress and participate in wealth creation for all stakeholders not just the investor.
