Retail Joe Skips the party
Since early 2000 Amit Kshirsagar has been attempting to invest in equities via initial public offerings (IPOs). But subscriptions haven't been easy to get, and the only success the 29-year-old employee with Tata Consultancy Services has to show for his efforts were the shares of Tata Teleservices (Maharashtra) that came his way when the company went public in 2000. It's been virtually a dry patch since then, and the few IPOs in which he did get shares haven't been rewarding adequately. So some two years ago Kshirsagar took a decision to avoid the primary market like the plague.
Reason? "It hasn't been working for me of late. First I wouldn't get my allotment because of the high over-subscription levels. Thereafter, I realised I wasn't getting adequate returns once the stock got listed. So I decide that rather than block my funds for 30-40 days, it would make more sense to invest that money in the secondary market." Sure enough, once Kshirsagar started doing that, he began generating returns that were more attractive than IPO listing gains.
It's another matter that Kshirsagar has of late all but bailed out from the stock markets themselves. Equity as a component of his total savings today stands at just 10-15 per cent, from peak levels of 70-75 per cent a few years ago. ("The losses booked on my intra-day trades and the increasing volatility in a rising index have discouraged me from investing in the equity market," he shrugs). Kshirsagar may be one of a select few who have cashed in their chips in the secondary market, but on the IPO front he clearly isn't the only one staying away from new issue paper. Aggressive pricing by issuers coupled with lower listing gains in a heated market have resulted in investors turning cautious.
A few apparently high-priced issues, like those from DLF Universal and ICICI Bank, for instance, saw a muted retail response. And a quick glance through the past 40 issues that hit the primary market since February 2007 reveals that some 25 per cent of them listed at a discount to the offer price (see First Day, No Show). The retail component (35 per cent of the entire issue) in a few cases was even undersubscribed, with the underwriters having to come to the rescue. The highest returns on listing were clocked by two telecom stocks, Idea Cellular and Spice Telecom, with gains of 21 per cent and 23 per cent, respectively. That's still a far cry from the days when issues like Sobha Developers and Tech Mahindra showed spectacular opening gains of 74 per cent and 44 per cent, respectively. The 56 issues that hit the primary market in 2007 have recorded an average return of 15 per cent, as against an average return of 22 per cent from 83 issues in 2006.
"Poor listing gains have been the main reason for retail to wither away from the market. Just one bad IPO is enough to result in a whole lot of investors disappearing from the primary market," says Rajeev Mehrotra, Co-Head Investment Banking, Edelweiss Financial Services. Mehrotra feels that, at 15,500 levels, retail investors think their chances of losing money are greater than of gaining.
Adds Amit Rathi, MD, Anand Rathi Securities, a Mumbai-based broking firm: "Heated markets, aggressive pricing and uncertainty in sectors like real estate have been the reasons for the poor retail participation in the primary markets, of late." Orbit Corporation, a real estate stock, for instance, listed at an 18 per cent discount to the offer price. The Rs 9,200 crore DLF IPO too could be seen as a victim of the negative sentiment clouding the property sector; the retail component of the IPO remained undersubscribed, at 0.9 times (the entire issue was oversubscribed 3.3 times). As for aggressive pricing, analysts point to ICICI Bank's follow-on issue (priced at Rs 940 per share) as a perfect example; the retail component just about got subscribed.
It may take a while for retail to come back with a bang into the primary market. One thing is for sure: At an index of level of 15,600, with the 30-share Sensex quoting at a price-earnings multiple of 23 times, companies that are keen to attract retail investors will have to offer shares at a 25-30 per cent discount to enable them to make decent gains on listing day. However, with 65 per cent of an IPO reserved for non-retail money bags, the question is: Are issuers really concerned about the small investor in the first place?
Yet, in theory there's little doubt that IPOs are an ideal route for investors to take the dip into equities. As Nilesh Shah, MD & CEO, Envision Capital, points out: "An IPO is a good option for investors looking to create a fortune. Watch out for the new leaders on the block. Today's wealth creators are those that tapped the market in the past; therefore, it is inevitable that tomorrow's leaders will emerge from players who are tapping the primary markets today. This provides investors with a huge opportunity to create massive amounts of wealth for oneself."
