Investors eye primary market after success of MCX initial public offering

The 20 per cent rise in the Sensex between 30 December 2011 and 22 February 2012, and the success of Multi Commodity Exchange's (MCX's) initial public offer , or IPO, in February have given hope to investors that the primary market-where companies sell new shares-may be set for a revival. Last year, only 40 companies, that too mostly small and medium, had floated IPOs , as the Sensex went on a free fall.



The MCX issue was subscribed 54 times. The retail category got bids for 19 times the shares for the category. Does all this signal an impending IPO boom?

TIMING IT RIGHT
The MCX issue was floated amid a sudden rise in equity indices and was reasonably valued. Also, the MCX IPO received a good (5/5) grade from rating agencies Crisil and ICRA.

The shares were priced at 13-14 times estimated 2012-13 earnings. Stocks at less than 15 times earnings are considered reasonably valued.

Prithvi Haldea, chairman and managing director, Prime Database, a primary market tracker, says the MCX issue got a good response as the market thought the company was strong and the IPO was attractively priced.

"There is no bad market for a good investment. If a company's fundamentals are good, it can get a good response irrespective of the market conditions," he says.

However, timing alone will not serve investors' interest. Pricing is important too. The tepid response to the ONGC share auction in February proves this point. The floor for the auction was fixed at Rs 290 a share, 4 per cent more than the stock price a day before the auction. The steep premium was one reason the auction failed to generate much interest.

IN THE PIPELINE
The government's disinvestment drive and rules mandating public sector undertakings (PSUs) to offload at least 10 per cent stake and private sector companies to divest 25 per cent stake to the public by June 2013 should lead to a flurry of IPOs and follow-on public offers (FPOs).

Eight PSUs, including MMTC, HMT, National Fertilisers, Neyveli Lignite, RCF, State Bank of Mysore and STC, and around 40 private sector companies, including Wipro, DLF, Reliance Power, Omaxe, Bajaj Corp, Godrej Properties, Jaypee Infra, L&T Finance, will have to sell shares to comply with the norms. An SMC Global Securities report says such companies will have to sell shares worth Rs 25,000 crore by June 2013.

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However, not all these companies will sell to retail investors as the Securities and Exchange Board of India, or Sebi, has opened two more windows-auction for top 100 companies by market capitalisation and institutional placement-for stake sale.

The government also plans to reduce holdings in Bharat Heavy Electricals, Steel Authority of India, GAIL and Oil India. It's not clear if it will go for the FPO or the auction route.

Some other companies that have Sebi's approval for IPOs are Tata Autocomp, Reid & Taylor (India) Pvt Ltd, Joyalukkas India, Tribhovandas Bhimji Zaveri and Mahesh Tutorials.

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NO BOOM YET!
The IPO market will gain from the upbeat sentiment in equity markets, but experts don't see an IPO boom yet.

The market is selective and is evaluating both balance sheets and growth prospects of companies, says Raj Majumdar, chief executive, Auroch Investment Managers.

"The market is expecting an improvement in the coming quarters. As in all cyclical upturns, we are seeing better-quality paper entering the market first to offer value that will break investor inertia of the last nine months," he says.

Prithvi Haldea of Prime Database says the success of the MCX IPO does not mean a sure-shot IPO boom. He says for a boom in the primary market, the secondary market should be more vibrant than it is at present.

Investors, therefore, need to be cautious while buying shares in IPOs.

ONE-DAY WONDERS
A key driver of IPOs is listing gains-the difference between the issue price and the listing price. It has been seen in the past three years that irrespective of the quality of the companies, most shares end the listing day with a gain. This is why investors are sometimes indifferent to fundamentals and fall prey to price manipulation by brokers and lead managers.

To end this, Sebi, in a circular in January 2012, ordered a circuit filter from the first day itself. Earlier, the circuit filter was set on the second day. The move is aimed at checking price manipulation and volatility.

Under the new rules, if the issue size is up to Rs 250 crore, the shares can trade within 5 per cent of the equilibrium price discovered in the pre-open session. The range for issue sizes above Rs 250 crore is 20 per cent.

{table}Tarun Bhatia, director, capital markets, Crisil Research, says, "The norms will make stock markets more efficient by ensuring that macro factors play a larger role in a stock's performance."

Will this make IPOs less attractive? Haldea says investors can still benefit from listing gains, all they have to do is wait for a couple of days instead of booking profit on the first day.

"It will bring focus to long-term business value and not listing gains," says Majumdar of Auroch Investment Managers. However, he says, as long as the focus is on speculative listing gains where the investor is looking to gain from the stock's upside in the short term, it will be difficult to check price volatility in newly-listed companies.

MAKING THE GRADE!
IPO grading is based on a company's operational and financial potential. The process overlooks the IPO's pricing and market sentiment. This, say experts, makes it not a very useful tool to predict an IPO's short-term performance.

Data of the past three years show little correlation between grades and listing gains/losses. In 2011, out of 22 new issues that listed at a gain on the first day, 19 had got grades below 3/5. In 2010, 13 IPOs with grades below 3/5 (out of the 33 to list with gains) ended the first day with listing gains.

However, listing gains do not ensure long-term performance. Tarun Bhatia of Crisil says, "Listing performance does not reflect a company's fundamentals. Multiple analysis have proved that companies with better fundamentals give higher returns than others over the long run."

If the equity market continues to show improvement in sentiment and performance, we may see a lot of action in the IPO/FPO segment.

For retail investors, though, it is important that they do not fall into the listing-gain trap and buy shares of companies with strong fundamentals.

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• Time your IPO investment correctly as a buoyant market is key to a share sale offer's success.
• Don't invest in an issue priced at a premium. Even ONGC share auction failed to enthuse investors.
• No more 40-50 per cent gains on listing day after new Sebi IPO norms. Investors, therefore, must stay longer for any substantial gains.
• Do not ignore IPO grades completely even if you seek only listing gains. It is always better to be on the safer side.

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