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Where have the listing gains of IPO gone?

Jitendra Kumar Gupta
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Jitendra Kumar Gupta

Moneycontrol Research

Our study (shown in graph) on the behaviour of the last 100 initial public offers (IPOs) reveals that there is a 0.87 correlation between the listing gains and the number of times an IPO is subscribed, which is close to perfect in statistical terms.

If this holds true, in the ongoing season where most of the recent IPOs have barely managed to get subscriptions, the IPO market may turn out to be less exciting for those looking to make quick gains or listing gains.

Liquidity crunch

The top 20 IPOs which were subscribed by less than 2 times have delivered on average 3% negative returns on the day of listing.

“There is a squeeze of liquidity both from the retail and foreign investors. Rising interest rates in the US and trade barriers have made the US market more lucrative and foreign investors are pulling out their money from the emerging markets like India,” said Ashutosh Maheshwari who earlier headed the investment banking arm of Motilal Oswal.

The last IPO that got subscribed by a huge margin was Apollo Micro Systems, which was subscribed by 248 times and listed with a gain of 65%. Although it was a small IPO with an issue size of mere Rs 156 crore, its timing was perfect as it got listed on January 22, a time when the Sensex touched a lifetime high of 36,444 points. Post that, Sensex has corrected close to 10%. Part of these worries spilled over to the primary market whereby investors are wary of valuation impacting subscription and thus eroding listing gains.

“In a rising market no one bothers about the valuations and we have seen companies asking for hefty valuations. IPOs were subscribed because the managers or the bankers to the issue made commitment and got the subscription. But today in a falling market this has become difficult. People have started to realise that they cannot give hefty valuation,” said Deven Choksi, MD, KR Choksey

Hurry to save tax

In response to why so many IPOs are hitting the primary market, one interesting observation is that the companies and the investors are rushing to save tax. “One biggest problem is supply or sudden rush because of the applicability of long term capital gain tax post March 31, 2018. If you observe most of these are offer for sale. ICICI Securities is raising Rs 4,000 crore, which is entirely marked for offer for sale. If they are able to close it on time, original investors will save close to Rs 360 crore of tax. But one needs to ask the larger questions. To save few crores why are companies rushing and killing the primary market?” said Arun Kejriwal Director, Kejriwal Research.

Grey market

Market pundits also highlight the marketing angle, which was lacking in many PSU sector IPOs. To put in perspective, Bandhan Bank’s Rs 4,470 crore issue was managed by India’s five leading merchant bankers whereas a similar size issue such as Hindustan Aeronautics (HAL) was managed by two merchant bankers. The grey market premium of HAL was hovering at around Rs 10 a share or merely 1% of the offer price. Compared to this, Bandhan Bank’s grey market premium was at around Rs 45 a share or 12% of the issue price.

“Because there is very marginal grey market premium left, the HNIs (high net worth individual), who work on leveraged money and hedge some of their exposure in the grey market through selling shares, have been absent as there is very little or no incentive for them as there is no short term money to be made in the absence of listing gains,” said Kejriwal.

Another important point that can be made in the case of HAL and Bharat Dynamics (Defence sector) was that the FIIs (category III) were not eligible to participate in the issue thus hitting the overall subscription figures. They are not allowed to participate in secondary market as well. Bharat Dynamics, where most research houses had subscribe rating, fell close to 8-9% on the day of listing.

“Subscription is speculative business. Listing gains have nothing to do with the fundamentals of the company. If the liquidity is low even if the fundamentals are good the IPOs will fail to deliver,” said Maheshwari.

This technical factors may be impacting high quality businesses and savvy investors got to take note of the same.