2008 was the year that, many hoped, was going to be the year of mega IPOs in India. The stock markets were rallying to a new high, and subsequently, Reliance Power‘s IPO was oversubscribed 73 times. But, the company’s shares tripped on the listing on February 11, 2008, and so did the stock market by 834 points. It was Monday — a Black Monday for India.
Nine years later, 2017 is also being touted as a year of IPOs, with companies raising over Rs 50,000 crore so far, and several others slated for their public issues. Some have even entered the exclusive club of the companies mobilising over Rs 1 lakh crore and several issues have been oversubscribed by more than 100 times, even at higher valuations. The reason: High liquidity in the market, perhaps, due to demonetisation.
Investors make a beeline
Prataap Snacks‘ IPO, priced at an inexplicable 202 times earnings, got oversubscribed by 47 times and D-Mart IPO, which was priced at relatively higher as compared to peers, saw listing gains of more than a 100%. In fact, D-Mart, a profitable supermarket chain backed by veteran stock market investor Radhakishan Damani, collected Rs 1.37 lakh crore for its IPO size of Rs 1,870 crore. Another company to have entered the Rs 1 lakh crore club was Cochin Shipyard which collected Rs 1.11 lakh crore for its IPO size of Rs 1,468.11 crore. This trend was largely seen in the years 2007 and 2008, which was followed by a stock market crash.
Valuations get stretched
But does the IPO rally of 2017 mean it would lead to another crash like 2008? While investors, companies and shareholders are rejoicing the record IPO season and, as observed by brokerages, are chasing listing gains; many brokerages are worried, and have called it unsustainable. “A lot of IPOs are being sold at crazy valuations, with a lot of exuberance. It is not sustainable,” Yogesh Nagaonkar, Fund Manager at Bonanza PMS told FE Online. Harshil Sethia of BP Wealth also expressed concern over IPOs being overvalued. “The bubble has to burst sometime,” he told FE Online recently.
Promoters seek the exit door
Not just over-valuations and oversubscriptions but promoters selling their shares or part exiting their shareholding in the companies also give a negative signal. “As for IPOs, investors, even institutional investors, are looking for listing gains. In many cases, promoters themselves are exiting the stock holding,” Yogesh Nagaonkar said. There were many prominent IPOs including Godrej Agrovet, SIS Ltd, Eris Lifesciences, BSE Ltd, and others, in which promoters sold at least part of their stakes.
“The worrying point is that a lot of investors are coming into the IPO markets with the expectation of quick listing pops. It’s definitely a worrying sign to see oversubscription to these levels across categories. Oversubscription reduces the probability of getting an allocation and therefore making decent money on the investments,” Vikas Khemani of Edelweiss Securities told ET Now in an interview.
Issuer controls the sales narrative
Even a leading US-based investor Mohnish Pabrai cautioned against investing in IPOs, saying that IPOs are auction-driven sales where pricing can get extreme which is going to hurt more than it is going to help. “First off all an IPO is a company selling shares into the market. The company controls the timing, the company controls the story… These are auction-driven entities basically tend to give us a pricing that goes to extremes,” Mohnish Pabrai said in an interview to ET Now.
The apprehension among brokerages on overvaluation and oversubscription is in line with global market worry. As the Black Monday of 1987 enters the 30th year, analysts say it was overvaluation among other reasons that led to the historic global market crash.