The present markets have become extremely volatile and weak. We seem to have lost our mind and continue to blindly follow overseas cues. These are some observations on some interesting and key takeaways from the market in the present scenario.
IPO’s don’t seem to be doing too well and suddenly we find that the new buzz word is bond issues. The same grey market instruments like “koshtak” where the whole form is bought and the premium per bond instead of shares are being quoted. Some intermediaries are selling bond issues like equity issues and talking about listing gains. These bond issues are keeping many investment banks and broking houses busy and with one bond issue every week currently happening, no one is really complaining.
The recent IPO’s in the equity market have been a complete mixed bag. The last issue which closed on Friday was from Tree House Education. The company tried to play safe and fixed a price band as big as Rs 132-153, with an objective to take advantage if the markets improved. They also offered a discount of Rs 6 per share to retail investors. Unfortunately markets were bad and the Anchor book was also subscribed at the lower end of the price band at Rs 132. The overall subscription levels were not too encouraging and the issue just aboutmanaged to pull through.
Friday saw the listing of L&T Finance Holdings Limited. This company also had tried to take advantage and kept a big price band. The pre-IPO allotment done by the company was at Rs 55 and the price band was this price, plus minus Rs 4 on either side making it Rs 51-59. The anchor book was done at a 0ne rupee premium to the pre-IPO price at Rs 56. However QIB’s let the issue down and the issue had to be priced at Rs 52. The HNI portion saw withdrawals which were more than half the total book and the overall HNI book which closed for subscription at 6.15 times was reduced to 5.94 when final bids were in and became even less than half when allotment was made at 2.94 times. Withdrawals are a phenomenon which happens in every issue depending on the market condition and likely allotment and listing price. It does not only happen in the case of IPO’s like Vaswani Industries.
We then recently had an issue from Inventure Growth which is a stock broking firm. The company issued shares at a price of Rs 117 at which price the PE multiple based on fully diluted, post issue capital based on March 11 numbers would be a staggering just about 40 times. What is noteworthy is the broking business in general is not doing well and this company in particular had only in the previous year chosen to close down its arbitrage business which was the biggest income generator. The company chose the other route of over pricing the issue and then using “friendly intermediaries” who were given other forms of incentives to sell the issue. The issue was subscribed, had a very explosive start on listing day and is now trading at PE multiples of close to 70 times. It may be noted that well established broking houses like MotilalOswal and Edeleweiss are trading at multiples of just about 10 or roughly 1/7th of Inventure.
To add insult to injury this company chose not to have even a road show for its IPO but chose to have a listing ceremony for the company.
Yet another company which did the same was Shilpi Cable Technologies Limited which issued shares at Rs 72. This company and its merchant banker chose not to market the issue and decided not to have a road show but again had a grand listing ceremony. I believe the entire process of an IPO which invites an interaction between the issuer company and the likely investing public is being twisted and put into a different shape. There is an issue opening ad, the issue opens with valuations which cannot be comprehended, the issue manages to get subscribed and lists. On listing it bombs either on the first day itself as Shilpi Cables or a couple of days later like Timbor Home. The end is fixed and pre-determined or as people may say fait-accompli.
Tuesday sees yet another issue opening in the form of Brook’s Laboratories. The company is seeking to raise Rs 63 crs in a price band of Rs 90-100. Not much is known about the company except that the merchant banker is common as in the case of ShilpiTechnocables. This company has also not chosen to have any roadshow and like in all such companies is extremely overpriced.
In terms of bond issues last we saw the successful issue from Shriram City Union and this week will see the issue from Mannapuram. Mannapuram is offering bonds with two maturities of 400 days and 2 years. The 400 day issue becomes an attractive investment from tax purposes as no interest would be paid during the life of the bond and would accrue on the instrument to be paid on maturity. This could be used as a capital gains instrument and become effectively tax free if held to maturity.
The following week Muthoot the loan against gold company would be launching its bond issue.
I believe the time has come where promoters and merchant bankers need to introspect about the state of the market and about valuations at which offerings are to be brought to the market place. If the quality of issues at fair valuations does not happen, the proliferation of “MANAGED” issues will grow very rapidly as is currently happening and will kill the interest in the primary markets completely. I believe this is not in the interest of primary markets which are a catalyst to raising capital, the merchant banking community and the promoters looking to tap the capital markets. With SEBI planning to introduce track record of merchant bankers bringing issues, it would only be a matter of time before people realise the good from the bad and make life difficult for the “managed” issues.
We have just celebrated our 64th Independence Day and the need of the hour as is being seen and felt all over the country is to weed out corruption and bring better governance. Let us hope when we celebrate the 65th Independence Day one year from now, the capital market intermediaries and community is able to hold their heads high and say that we have done our bit for better governance and reducing corruption if not eliminating it.
