Pran­jal Sri­vas­tava

Dalal Street Investment Journal - - SPECIAL REPORT -

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.

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