This calendar year so far, five companies were listed on stock exchanges. In 2007, the average number of IPOs in a month was eight. In 2008, this number fell to just three. The average issue size weighted listing premium for IPOs in 2007 was 34% while this figure dipped to 12% in 2008, according to a report on IPOs by Edelweiss Capital.
Many analysts believe the vibrancy of the primary market is inseparably linked to the buoyancy in the secondary market. The sagging sentiments in the secondary market have in the past forced many companies to pull out their planned IPOs. Emaar MGF, Wockhardt Hospitals, and SVEC Constructions withdrew their primary issues when share prices were ruling low in the secondary market.
In comparison, a lot of interest was generated in IPOs this year. Adani Power and NHPC witnessed good response from investors, getting oversubscribed 22 times and 24 times, respectively. Even though most brokerages were not positive on Adani Power, the issue not only sailed through but also is trading with good volumes. Similarly, Mahindra Holidays & Resorts India Ltd, which was listed in July, also attracted a lot of investor interest even though holiday resort sector is not rated very high by analysts.
Most of the companies newly listed this year are trading at levels comparable with the listing premium or more (see chart). Market experts believe risk appetite is clearly back in the market and that is aiding the primary issues. As market conditions are improving, companies are again lining up to raise fresh funds from the capital market. But most analysts believe year 2009 will not be an easy ride for the primary market either. Even though there exists no bull market in the real sense, IPOs are receiving good subscription. Though the retail participation is low due to lack of conviction, informed investors such as instititutions are bullish and are responding to IPOs well.
The success of the primary market will depend, firstly, on the liquidity level in the system. On this count, there is a huge cash pile lying with institutions currently. Those who do not want to lend out their cash pile will flock the primary market. Navin Mathur, associate director, Angel Broking, said, "There is enough money lying with institutions which they have to invest. The overall sentiments globally have improved and the sense of uncertainty is over for good. But this needs to be pronounced in the corporate results for at least five months or so."
Only sustained growth in corporate earnings for two or three quarters will restore confidence in investors, say analysts.
Secondly, whether the forthcoming IPOs are expensive or cheap will weigh on the fortune of the primary market in general. Broking firms believe that if the pricing is right, investors will lap up IPOs even in the present market condition. The public issue of the government-owned NHPC Ltd, many analysts say, was over-priced. It could have been around Rs 5-10 lower.
"As far as IPOs are concerned, one must leave something on the table for the investor. Retail investors will make money from such issues as NHPC only if the government allows them to. If the forthcoming IPOs are not over-priced, they will be a success," said Jayesh Sheth, managing director, KC Securities. The IPO of Adani Power, for example, was appropriate for institutional investors but not for retail investors. The stock was finally listed at Rs 105 on August 20, and is hovering at the same level currently.
Yogesh Radke, analyst, Edelweiss Capital, strongly believes the primary market is set for a revival. "In my opinion, the IPO market will stage a comeback. We are looking at the market positively. There is enough liquidity, and IPOs are getting good response, especially from institutional investors. This is evident from the subscription level of the quota for qualified institutional buyers (QIB)," he said.
Another issue that needs a re-look at is mandatory IPO grading which came into effect from 1 May, 2007. IPOs in all grades have seen wealth erosion in the range of 20% to 70% irrespective of the grading they received, a recent research by SMC Capital showed. IPOs with Grade 4 have, interestingly, underperformed those with Grade 3 and 2. Investors who have put in money in IPOs with Grades 2 and 3 have fared better than the investors who have invested in IPOs with Grade 4.
The expedition of the refund of application money has encouraged investor interest in primary issues. Capital market regulator Securities and Exchange Board of India (Sebi) has taken a lot of proactive measures to enhance the efficiency of the banking aspect of market operation.
The sustainability of the primary market is pivoted on a number of factors. Significant among them are, as described above, the liquidity level in the system and the valuation of the shares.