Future IPOs may have to lower valuations

The muted response received by the recent public offers could force companies planning their initial share sales to revisit their valuations.

According to industry players, firms that have filed their draft prospectus are looking at lowering their valuations to ensure smooth sailing of the issuances. Five of the seven companies that went for public float last month struggled to sail through.

After filing for an IPO, companies are allowed to revise their valuations by up to 20 per cent from initial expectations. If the revision is steeper, the company has to re-file its offer document with the Securities and Exchange Board of India.

Sources said several firms and investment bankers had got into a huddle to work out reasonable valuations in the wake of a spike in market volatility. “Investors have not been very comfortable with the valuations of some of the recent offers. There are concerns about liquidity drying up in the market. Add to it the political uncertainty ahead of the 2019 general elections. In such a scenario, companies will either have to wait until earnings catch up with the valuations or lower the pricing,” said Naraynan Sadanandan, executive vice-president, SBI Caps.

According to bankers, investors were becoming increasingly choosy about the current initial public offerings (IPOs) as companies are leaving little money on the table. Retail investors are also shying away from the public offers as majority of the issuances have failed to provide formidable listing day gains.

Of the 12 offerings that have been launched since the start of the year, the retail category remained undersubscribed in seven cases. In such a scenario, firms planning their issuances should consider attractive pricing, bankers said.

Following the recent correction, the secondary market valuations have come down. New companies typically will have to offer a slight discount to their listed peers.

“Companies with good business models and right valuations will find investors. However, some of the recent transactions failed to garner sufficient support due to company-specific issues. When markets are going down, investors expect more discount on the IPO pricing,” said Munish Aggarwal, vice-president, Equirus Capital.

Experts said new firms had to leave sufficient legroom for investors to factor in market volatility. “The response for some of the recent IPOs has been tepid. Retail and wealthy investors have skipped most of the recent issuances. This can continue as long as the markets remain choppy,” said Gaurang Mehta, executive director (investment banking), Axis Capital. Most of the forthcoming IPOs will be an offer for sale by private equity (PE) players. Bankers said PE investors had a pricing mandate and hence, could be reluctant to lower valuations.