Falling retail subscription levels indicate tough times in store for the new issue market

Retail investors seem to have learnt a lesson from the high profile debacle of Re  Reliance  Power’s IPO in early 2008, by shunning most long gestation infrastructure IPOs. However, the same concerns are not being shared by qualified institutional buyers (QlBs) and high net worth individuals (HNls), who have bailed out many an issue
on their own strength, despite the fact that 30-35 per cent of the issues are reserved for retail investors. For example, JSW Energy, Godrej Properties, Cox and Kings and even the state-owned Oil India attracted impressive subscriptions because of massive participation from QIBs even though retail response was weak. Even in the case of Raj Oil Mills, it was HNIs who helped the issue sail through.

According to Jagganadham Thunuguntla, head of equities at SMC Capitals, the combination of expensive valuations and poor quality issues have made retail investors wary about the current IPO pipeline. A case in point is the Aqua Logistics issue, which wanted to raise Rs 150 crore in the price band of 200-225, but had to extend its closing date and trim its offer price from the earlier Rs 220-230 band. While some of the IPO issues are of unknown descendants, B Madhuprasad, vice-chairman of Keynote Corporate Services, which managed the small-sized.

Emmbi Polyarns and Thangamayil Jewellery issues, feels that since many of these entities are at an early stage of growth, they should not be deterred from accessing the public markets. Importantly, the appetite for long gestation projects such as power seems definitely out of favour and investors are pining for modestly priced issues which have the potential to offer reasonable returns, say merchant bankers. The exceptional response to Infinity Computers, which got oversubscribed almost 43 times, has stumped some industry observers.

Going ahead, market participants are unanimous that promoter expectations will have to be tempered. According to Thunuguntla, the unanticipated softness in the markets since January will act as a brake on unbridled pricing epectations. “Even the government will be on the back-foot with its divestment plans as they will have to offer a reasonable valuation for investors so that it leaves them with decent returns,” says the SMC executive. Issues such as NHPC, which were priced at 33 times earnings, may be a thing of the past. Market experts feel future issues may attract retail investors only if they are offered in the 15-16 times earnings band. But given that there is keen institutional interest, and promoters and merchant bankers have rarely played ball in the interest of retail investors, the possibility of lucrative offerings seems remote.

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