Investment banks need to be cautious of IPO pricing, say Kotak analysts

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Published: December 20, 2018 12:05:58 AM

Due to a meltdown owing to multiple reasons, IPOs have slowed down in 2018 so far. However, in 2017, more companies had lined up for listing, as a newly-listed company gets good valuation in an expensive market

Investment banks need to be cautious of IPO pricing, say Kotak analysts

A day after the chief of markets regulator Sebi expressed concerns over the pricing of initial public offerings (IPOs), analysts at Kotak Investment Banking agreed investment banks need to be more careful while pricing the IPOs.

“As some listed companies are quoting below their issue price, bankers need to be more diligent. In difficult markets, investment banks can give the right advice to clients and be careful about the choice of deals,” said S Ramesh, managing director & CEO of Kotak Investment Banking.

Due to a meltdown owing to multiple reasons, IPOs have slowed down in 2018 so far. However, in 2017, more companies had lined up for listing, as a newly-listed company gets good valuation in an expensive market. “Pricing is always the function of where the markets are moving, but now investment bankers have to be more careful. However, now the challenge is to satisfy the issuers and investors as the market has seen meltdown,” said V Jayasankar, senior executive director & head of equity capital markets at Kotak Investment Banking.

On Tuesday, Sebi chairman Ajay Tyagi had expressed concerns over the slow pace of IPOs hitting the market and asked investment bankers to play a key role on pricing to draw investors.

Total deal value of the equity capital market in calendar year 2018 has reduced to 10% from 28% last year, while private equity (PE) deals too have reduced to 23% from 27%. However, the share of mergers and acquisitions (M&As) has increased to 67% from 45% in CY18, according to a report by Kotak Investment Banking.
Deal activity in the last quarter of CY18 came to a standstill amid rising global concerns over a trade war between the US and China, liquidity crisis and political uncertainty ahead of state and general elections in India.

Kotak Investment Banking believes financial institutions groups (FIGs) will continue to dominate the IPO landscape in the near term, accounting for 50% of the total IPO volumes in CY18 so far.

Ramesh added that the IPO activity will likely pick up pace in the second half of CY19 with FIGs as preferred sector followed by real estate, consumer & other growing mid-cap stocks.

However, he warned that the outcome of election and prevailing oil prices may surprise the market in either direction.

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