Why are we seeing so many IPOS flooding the markets?
We expect India to remain well-placed among emerging markets on the back of continued decline in the twin deficits, adequate forex reserves, improving debt/ GDP ratio and with the inflation trajectory below RBI benchmark. The government’s pro-reforms agenda remains a positive in the medium to long term. Further, the domestic and foreign institutional investors have a positive outlook on the Indian growth story, which keeps the primary market active. Also, several differentiated companies hitting the markets are attracting the investors and keeping the IPO market flooded.
What would you advice retail investors at this juncture on investing in IPOS? How does one identify the right IPO to invest in?
Retail investors' appetite for initial public offers in 2016 and 2017 is probably the highest if bids on day one of IPOS are any indication.
A long term or short term investor should go through the information disclosed in the offer document as extensive information is available in the format prescribed by SEBI. Apart from pricing and other company-related attributes, success of an IPO also depends a lot on the market sentiments at the time of listing.
The most popular method of valuation is through 'peer valuation'. A comparison of the price of an IPO with the share price of its peers which are already trading can give an idea whether a new offer is overvalued or undervalued. One should compare vital ratios, such as 'book value' and 'operating margins' of the IPO issuing company with those of other companies in the industry.
Do you buy the argument that the large number of IPOS hitting the market will eventually suck out liquidity from the secondary markets?
Over the past two years, cumulative DII inflows were at ~USD 16 bn vis-à-vis FPI inflows of USD 7.3 bn. The two preceding years saw cumulative FPI inflows of ~USD 36 bn and DII outflows of ~USD 18 bn. The emergence of DIIS in recent times has been driven by liquidity arising from strong retail flows into MF schemes. From the perspective of IPOS, foreign institutional investors have contributed ~INR 7,125 crore to anchor investments over the past five years, while domestic institutional investors have contributed ~INR 5,821 crore. Typically, we have seen DIIS play a larger role in issuances of size upto ~ INR 500 crore, while foreign investors play a predominant role in issuances greater than INR 1,000 crore. Both international and domestic institutional investors are vital for healthy capital markets. Given the high cash ratio of the MFS and the keenness of FIIS to invest in the India growth story, I do not see any liquidity crunch in both primary and secondary markets.