Bullish on the IPO market in India, global investment banking giant Rothschild has said fair pricing has become a must for an offer to succeed and the promoters can no longer sell ‘pipe dreams’.
“The investors have become much more smarter today and they are forcing the companies to price the public offers fairly. This has ensured that the market has an appetite for even larger offers, provided the pricing is fair,” Rothschild India Managing Director Amitabh Malhotra said.
After a long lull, there has been a significant pick up in the IPO market in recent months, although most of the issues — including those that have already hit the market and those in the pipeline — have been relatively smaller.
The last IPO with a size of close to USD 1 billion was nearly three years ago, Malhotra pointed out.
“Having said that, a lot of IPOs have generated very good demand even if they have been very small ones.,” he added.
“It is true that big deals are not happening, but I am not saying they cannot happen,” Malhotra told PTI in an interview here.
“If you look at the kind of demand that has been there for some of the issues, such as VRL Logistics, and the way the mutual funds and other domestic investors are coming back to the market, there is demand for large issues also.
“If you put a good quality IPO out there which is large one and has a fair pricing, I think it will go through,” he said, while adding that there are not many big ones in the pipeline as of now.
As per the industry data, more than 30 companies have lined up plans to raise funds totalling over Rs 20,000 crore through public offers. These include InterGlobe Aviation Ltd, which runs the country’s biggest airline by market share under ‘IndiGo’ brand, Coffee Day Enterprises and Matrix Cellular.
At least 21 of these firms have already got the go-ahead from market regulator Sebi to launch their respective IPOs.
The flurry of activities also comes at a time when the regulator Sebi has announced a slew of fresh reforms in the IPO space, including halving the listing period to six days.
So far this year, eight companies have collectively raised nearly 4,000 crore through IPOs. In comparison, a total of six IPOs had hit the market in the entire 2014 and together garnered just Rs 1,528 crore.
Malhotra said there are some big brands like Cafe Coffee Day and IndiGo, but there are not big ones in terms of size of the IPO.
“These are nothing compared to some large ones that we have seen in the past. Although some of the big IPOs suffered badly because of market pricing at that time.
“The message today is that if you show pipe dreams and you cannot defend it, it will not work. Today when you are doing an IPO, you must deliver on your guidance because the institutional investors today do not have any tolerance for such things,” he said.
Giving examples of some recent IPOs, Malhotra said that although small in size, they have generated unbelievable levels of demand that shows that even big IPOs can sail through easily if pricing is right.
At the same time, some well-known brands have failed and the reason must be the pricing again.
“Foreign investors have been back in India in a very strong way, but that has been mostly in the secondary market flows. Primary market flow is in a different situation where quality of issue matters a lot and the institutional investors are supporting good issues in a big way.
“The pricing is going to be driven by the investors. If you mess around with pricing, your issue will fail or you will suffer the consequences. There have been cases like that.
“Now issues are happening because they are a lot more sensible about the pricing. Not that they want to, but the investors have pretty much told them that if you mess around with it, you will face it.
“A discipline has come in, induced by the investors, and therefore deals are happening,” he said.
Malhotra said that the secondary market share sales to institutional investors, through QIP route, are also seeing similar trends.
“The institutional investors have become smarter and other investors are following them. The domestic investors are mostly stepping in for the FIIs because they feel that party is not over as FIIs do not go because the party is over but they do rebalancing of portfolio,” he added.