End of the silly season

A few weeks ago, Ravi Sardana, Senior Vice President, ICICI Securities, was at the receiving end of an earful. A number of promoters who had listed their businesses on the stock exchanges a couple of years ago were livid with the kind of valuations that more recent initial public offerings (IPOs) were getting. A couple of these businessmen also wondered why these companies were listing so early. “I don’t blame them (for complaining), as the madness in the market was clearly visible—a second-rung peer that’s tapping the market was getting a higher valuation than the leader in that sector,” shrugs Sardana. He also reveals that this was persuading a few businessmen to think about delisting and eventually listing again— just to improve their valuations.

It’s clearly been a silly season. But then such seasons don’t last forever (because they’re silly, right?). And when last fortnight the muchhyped IPO of Anil Ambani’s Reliance Power (RPL) flattered to deceive, it was clear that investors were in no mood to lap up just about everything that came their way. RPL lost 17 per cent on the day of listing, and at the time of writing was still quoting below the offer price (although it did gain 8 per cent after it informed the exchanges about a bonus offer to offset shareholder losses). RPL wasn’t the only company to suffer in a volatile market (which is feeling the heat, along with other global markets, from the prospect of a US recession).

In fact, RPL could consider itself lucky that its IPO scraped through. The likes of Emaar MGF, Wockhardt Hospitals and SVEC Construction weren’t so lucky, having to either withdraw or postpone their issues. “India was getting into crazy valuations. But the RPL IPO crossed all limits. In a way, it was responsible for spoiling the market, and also opened the eyes of FIIs (foreign institutional investors). As a result, no one is planning an IPO,” says an investment banker, requesting anonymity.

Adds Ambareesh Baliga, Vice President, Karvy Stock Broking: “The RPL IPO was over-hyped with investors investing only to make listing gains. No one was bothered about fundamentals of the company, which had nothing to show on its balance sheet. They had all invested on the 100 per cent premium the stock was enjoying in the grey market. However, subsequent disappointments with the market falling resulted in the premium coming down to Rs 80-100 per share. Yet, the stock falling below offer price came as a surprise.”

RPL wasn’t the only company with little to show in terms of projects on the ground. Emaar MGF didn’t have any major completed projects, but was commanding a valuation higher than more established peers like DLF and Unitech. Emaar was seeking to raise money at a price-to-earnings ratio (P/E) of 227-256 times; in comparison, DLF and Unitech trade at a P/E of 50-60 times.first half of Emaar MGF were lower than the first half profits of Unitech! Similarly, Wockhardt Hospitals was also trying to get higher valuation than its peers, Apollo Hospital and Fortis Healthcare. Despite the disappointment with the RPL issue, fact is that it did manage to raise $2.96 billion—enough to make it the world’s largest IPO till date in 2008. If the Emaar MGF IPO wasn’t withdrawn— the company planned to raise $1.6 billion—it would have been the second-largest IPO in the world so far this year. Despite the setbacks, 2008 has been a relatively good year so far, with Indian companies raising over $3.3 billion from eight issues; this makes it the largest IPO market in the world so far. But it may not stay that way for long. Says S. Ramesh, COO, Kotak Mahindra Capital Company: “Till sentiments improve, and we don’t get a clear direction of the secondary market, the primary markets will remain sluggish.

From here on, it will be a challenging job for a merchant banker as valuations will be scrutinised.” For retail investors, the message is clear. Don’t invest for listing gains; invest in companies.

— Mahesh Nayak