There is excitement that the primary market is showing signs of recovery, notwithstanding the recent losses in the secondary market. The loudest buzz is around e-commerce, the sunrise sector. Investment bankers expect a number of e-commerce players to go public in the next one to two years. Many have raised substantial sums of money from private equity funds and need to provide an exit route to the investors by getting listed on the stock market.
"In our conversations with various founders and top management leaders of Indian e-commerce companies, we got a sense that most companies would hit relevant milestones with regard to revenue and profitability in 12-24 months. This should clear the way for multiple IPOs (initial public offerings) from this segment," Macquarie Capital said in a recent report.
While that might happen in the future, there are about two dozen companies planning to raise nearly Rs 9,300 crore from the primary market through both IPOs and follow-on public offers, according to Prime Database. Of these, nine companies, including Lavasa Corp, Rashtriya Ispat Nigam, Sadbhav Infrastructure Project and Manpasand Beverages, have got the nod from the market regulator, Securities and Exchange Board of India (Sebi), to raise funds.
But does the market have an appetite for fresh Indian paper? The government plans to mobilise as much as Rs 69,500 crore by divesting its stake in government companies during the current financial year. Around Rs 41,000 crore of this is expected to come through public offers and another Rs 28,500 crore through strategic disinvestment. This is bound to suck out a lot of liquidity from the market.
But will the market absorb so much public-sector paper? "The appetite will be stock specific. We may not get much response from the retail investors here, but institutional investors will look to participate if the stocks are offered at a good price and the valuations look reasonable since they are already sitting on a neat cash pile. Retail investors will only participate if they wish to stay invested for the long-term," says Mayuresh Joshi, vice-president (institutional), Angel Broking.
An even bigger challenge for Indian IPOs is the fat pipeline of fresh issues in China. In early April 2015, China's securities regulator approved 30 new IPOs, which is widely seen as a move to cool its booming stock market.
Reports suggest that 28 among the 30 companies that published their share issue prospectuses in early April are expected to launch their IPOs over the next two weeks. The Chinese Securities Journal has estimated that the latest batch of IPOs could tie up as much as 3.7 trillion yuan ($597 billion) in subscription funds.
Analysts partly attributed the sharp fall in equity markets across the globe on May 6, including India, to this IPO wave in China, as foreign investors liquidated their positions to stock up.
Much will also depend on the secondary market performance of the companies that have recently raised money in the primary market. Three out of five companies that have debuted at the bourses so far this year are trading below their issue price. Among these stocks, Adlabs Entertainment is the biggest loser with its stock reflecting a loss of 23 per cent against its issue price of Rs 180 per share as on May 8.
MEP Infrastructure, which listed on the bourses on May 6, is trading at Rs 53.50, 15 per cent below its issue price of Rs 63 per share on the BSE. Shares of Ortel Communications, a company engaged in providing regional cable television services, are quoting Rs 168, 7 per cent lower than the issue price of Rs 181 per share. These three companies collectively raised Rs 873 crore through IPO.
However, the remaining two IPOs, VRL Logistics and Inox Wind, have gained 37 per cent and 28 per cent, respectively against their issue price.
So what explains this disparate treatment meted out by the markets to these issues post listing? Analysts suggest that most investors look at the themes playing out in the secondary market and accordingly invest in the primary market. Some invest to exit the counter on listing to make short-term gains, they suggest.
"There is a direct correlation between the primary and the secondary markets. Investors take the themes performing well in the secondary market as a benchmark to subscribe to the IPOs in the primary market. Since logistics as a theme is doing very well right now, such issues got a good subscription in the primary market as well," explains G Chokkalingam, founder & managing director, Equinomics Research & Advisory. This was proven in the case of VRL Logistics: its IPO was oversubscribed nearly 74 times.
Many believe investors will pick up issues where they find value, irrespective of the sector. For this, the pricing of the issues will be key besides earnings outlook of the companies coming out with these issues. Analysts expect logistics to be among investors' top picks.
So far as e-commerce IPOs are concerned, there are indications that these might still be some distance away. Bengaluru-based online retail major Flipkart does not plan to list on stock exchanges for at least two years as the company believes it is not prepared to face the "scrutiny" that a listed company is subjected. "We are still at a stage where we do not want to stand scrutiny on a quarterly basis. We would rather keep ourselves private for as long as we can and then we will see what lies ahead," Flipkart Chief Financial Officer Sanjay Baweja recently told Business Standard.
Note / Clarification: For IPOs approved by SEBI and those awaiting the regulators approval, the issue amount in Rs crore indicates the amount estimated by PRIME Database.