Experts says while euphoria in IPOs often makes them pricey and leaves room for disappointment, existing market prices provide a better anchor to OFS valuations
While some initial public offers (IPOs) in 2017 have more than tripled in value, every third IPO -- 11 out of 33 -- has proved to be a dud.
In comparison, the offer for sale (OFS) issues, where promoters diluted/offloaded their holding in listed firms via a separate window provided by the bourses, have worked out to be better. Data shows that investors have made money in eight out 10 companies that went the OFS way, with the best ones giving 30-50% gains over respective adjusted allotment price. Experts said while euphoria in IPOs often makes them pricey and leaves room for disappointment, existing market prices provide a better anchor to OFS valuations.
While 33 IPOs have garnered over $10 billion or more than Rs 65,000 crore this calendar year, it's not all hunky-dory for investors. With 33% of IPO stocks in the calendar year 2017 trading below their issue price, fingers are being pointed towards over-valuation of these issues. In 2016 there were 26 IPOs that raised nearly Rs 26,500 crore, according to PRIME Database.
IPO offerings like CL Educate (-36.16%), S. Chand & Co. (-29.42%), New India Assurance (-18.16%), GTPL Hathway (-14.79%) and GIC (-12.88%) have curbed some enthusiasm on the Street, after the whopping year-to-date gains in Avenue Supermarts (282%), Shankara Building Products (260%), Apex Frozen Foods (234%), Salasar Techno Engineering (163.47%) and CDSL (138.49%). The fact that a sizeable proportion of main-board IPOs haven't fared well shows that many issues may have been priced imperfectly.
"We have seen such instances in previous bull markets as well. Not all issues can strike that balance and consequently not much is left on the table for investors. Many of the poor performers did not get even 2 times subscription. This was already an indication of the appetite," says chartered financial analyst Anil Rego, CEO & founder of Right Horizons.
On the other hand, OFS issues haven't been that badly priced in general. This could explain why out of the 10 companies that completed their OFS in 2017 so far, only two (National Fertilizers and DPSC) are trading below the allotment price. OFS in companies like Hindustan Copper, Rashtriya Chemicals and Fertilizers (RCF), National Aluminium Company (NALCO), Bharat Electronics (BEL) and MOIL have given good returns to investors who invested in the offers. According to NSE data, there was virtually no gap between floor price and allotment price in most of the 10 companies that did OFS issues this year. In 2016, 8 firms witnessed the OFS route, NSE data shows.
Vikas V Gupta, CEO & chief investment strategist, Omniscience Investment Advisers, says, "With the OFS, the existing market prices provide some kind of an anchor to the OFS valuations. And the typical euphoria build-up is much less. This makes the valuations more justified. "For example, in August, Hindustan Copper OFS was done at an allotment price of Rs 64.75 and the shares are now up almost 50% to Rs 97 a piece. Adjusted gains post-OFS in BEL and MOIL have been risen with 1:10 and 1:1 bonus share issues, respectively.
With the IPO, the first-time investor or the less-sophisticated investor and also the highly sophisticated trader, who intends to make a leveraged bet and has some kind of "guess" of the listing prices, are the two types who participate. The sophisticated trader exits on the listing gains and the less-sophisticated investor is left holding the bag, says Gupta.
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