Will It Fire Up IPO Market? - GSPC

There are theories, and theories, but it’s not as if all of them work. Consider, for instance, the fact that any business in the world depends on two critical factors - demand and supply. If there is an excess of demand over supply then a business entity would make sense. Currently, India’s oil and gas sector seems to be in such a situation where demand is much higher than supply and the gap is only going to widen as we move ahead. Just to quantify, the demand and supply gap for crude oil in 2009-10 was around 99.72 MMT and is expected to catapult to more than 165 MMT by 2011-12. It is further expected to rise to 315.10 MMT by 2024-25. Similarly, in the case of natural gas, the demand and supply mismatch is to be in the region of 221 MMSCMD by 2024-25.

This indicates a good amount of opportunity for players in the oil and gas field. So does this demand and supply gap mean better returns for investors in the stock market? This crucial question arises in the wake of Gujarat State Petroleum Corporation (GSPC) planning to tap the primary market with 44.80 crore equity shares (FV Re 1) in June. Since this will be the largest IPO of 2010 (till date), it would definitely set the tone for the rest of the IPOs that would follow in the year 2010. Hence this attempt to understand the GSPC IPO.

But the question investors would like to pose is: if demand and supply should be the factors to consider for growth and capital appreciation, then isn’t there a huge demand and supply gap in the power sector too? Many power generation companies have tapped the primary market based on a similar theory and yet failed to provide capital appreciation to the investors. Just to cite a few examples, one of the biggest IPOs was that of Reliance Power which is still quoting below the offer price and so has been the case with NHPC and Indiabulls Power. Note too the fact that all the power sector related IPOs were from reputed groups and their issue sizes were also big enough to make an impact on the primary market.

Further, the past trend is not so exciting when it comes to large-sized IPOs, with many of them having failed to provide capital appreciation to investors. Our research team carried out a study of the large-sized IPOs with issue sizes of more than Rs 1,000 crore and which have tapped the market since 2007. Our finding suggests that there were 14 such IPOs (excluding Jaypee Infratech and SJVN that are not yet listed at the time of going to press and hence not included) and as high as nine are quoting below the offer price. In 2010, one large-sized IPO of DB Realty which tapped the market is also quoting below the offer price. History suggests that good or bad IPOs can change the sentiment of the market drastically and hence it’s very important to understand the GSPC IPO which would be in the region of Rs 3,500-4,000 crore. If GSPC can create wealth for the investors, it can fire up the IPO market. Let us understand the company first.