Special Report: 2015 The Year of IPOs

The year of 2014 was an important one because of the Lok Sabha elections. Indians, especially the Corporate India, were expecting a change in Governance. India’s economic situation became an ailing one, hence, it was necessary for the government to change so that the new government could take bold steps towards reforms and put India back on growth track. BJP came in to power with majority. This not only provided boost to India but also Corporate India. Huge expectations were built around the Modi Government to bring about such reforms that would kick-start the growth engine. Optimism and investor sentiment was clearly seen in the Indian Stock Markets.

2014 was a year wherein investors in the Indian capital markets became wealthier. The domestic market barometers, Sensex surged more than 35 per cent in calendar year 2014, clearly exhibiting expected revival in the domestic economy. Further, the same traction is expected to continue in 2015 also. The Indian equities are soaring and making new highs in almost every month. The reason for such highs is quite simple; it is the strong FII inflows which helped the equity indices sustain these high levels. Considering the strong momentum in the secondary markets, the primary market is too expected to follow the path and see good amount of traction in near future.

2015 will be full of actionable events from Indian capital market’s view point. The Indian economy is in a good position to show a traction in current year. The gradual improvement in economic growth, declining inflationary pressures, falling global commodity prices and importantly policy initiatives will be the key drivers for the domestic economy in current year. The new reforms implementation will transform the economic growth and will definitely start showing results in the improved corporate earnings. The central bank – RBI too gave indications and started easing the policy rates in early 2015. Every cut in the policy rate will re-rate the economy increasing liquidity in the economy in 2015.

On global front too, the US economy also started showing good traction. The worsening of Euro, Japanese and Chinese economy is also expected to create global liquidity arising out stimulus measures implemented in these economies. Hence, we can comfortably expect a good foreign money inflow in Indian market considering the way government has started implementing the reforms in the country. The golden combination of increasing liquidity and reform implementation definitely exhibit brighter days ahead.

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IPO TREND

Historically, it has been seen that as the average market Price to Earnings (PE) ratio starts approaching 20 mark, the markets start experiencing good amount of primary capital raising activity. The calendar year 2000, 2006, 2007, 2010 and 2011 showed increasing number of Initial Public Offerings (IPOs) as the average Indian market’s PE ratio was approaching levels of 20. However, the 2014 year was exceptional to this phenomenon and showed as low as 5 numbers of IPOs hitting to the domestic markets.

WHAT HAS CHANGED?

If we take a look back, at the market in general, it has not been IPO-friendly for last three years due to a variety of factors. This includes overall poor sentiments, secondary market volatility, promoters not getting the deserving valuations (Or even what they want), apprehensions of regulator’s views on valuations, lack of appetite for equity of big-time issuers from the infrastructure sector (especially power), telecom and real estate. In addition, the UPA government did not carry out even a single divestment of an unlisted PSU in the last two years. The last PSU IPO was that of NBCC in March 2012. However, there has been paradigm change in the political scenario at the centre. It was probably the first time in the history of independent India that an election was fought on the development plank. More so, it was after 30 years that any political party won with a clear majority. The ‘Modi’ magic that started last year with elections in four states out of which three were won by the BJP seems to continue with the latest elections in Jharkhand and Jammu & Kashmir. The winning spree of BJP will help the government to implements its reforms across the country by manipulating the state governments. This is very much important to implement the reforms such as Good Service Tax (GST), which have directly impact on the country’s GPD growth.

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SEBI – THE IMPORTANT REGULATOR

The market regulator plays a crucial role in growth of the country’s capital market. The Indian capital market regulator has proactively taken steps to restrict the black money mobilisation in the capital markets and market manipulations over the years. The stricter regulatory regimes such as regulations related to Foreign Portfolio Investors, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvIT), insider trading regulations for companies proposed to be listed are the prudent steps taken by the regulators. The stricter regulations ensure investor confidence and will improve in building the domestic capital market. In recent past Sebi, in its proactive step, had a discussion with new technology companies regarding the problems faced in raising capital. Concerned about the poor state of primary market, the Sebi wants to encourage domestic companies to list in home market instead of foreign markets. In past few years, the Sebi has taken several initiatives to give boost the domestic capital market.

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RUSH OF IPOS

Apart from that the current favourable macroeconomic factors which is providing support to market, there is a feel good factor of a strong government post elections. This will completely revive investor sentiments and with it the IPO market is also expected to revive in the first half of 2015. The secondary markets are already extremely buoyant and the bull-run is expected to continue, a usual prerequisite for revival of the primary markets. The equation is quite simple, every promoter wants to take advantage of the upbeat markets to maximise the value of their stakes. Hence historically it is been seen that when the secondary markets bloom the promoters want to time their primary market offerings.

The market regulator Sebi approved as many as five IPOs during the month of February. The five companies are Uniparts India, VRL Logistics, PNC Infratech, ACB (India) and Shree Pushkar Chemicals and Fertilizers. These companies are expected to raise about Rs 2000 crore to fund their business expansion and meet working capital requirements. Ortel Communication, that operates regional cable television network, announced its launch of Rs 115 crore IPO as March 2, 2015. Adlabs Entertainment, that operates amusement park Imagica and Aquamagica, also announced launch date of its Rs 500 crore IPO as March 10. Inox Winds and CL Educate are planning to launch their IPOs by end of March or early April. If these companies are able to succeed with their capital raising activity, one can expect a bunch of companies to tap the primary market floor in coming months.

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"The perception and perceived value created during the IPO period need to have a continuity post listing with strong investor relations program initiated by companies after they get listed."

Vivek Suchanti CMD, Concept Communication

Despite of good market rally in 2014, the number of companies, that came with IPOs, are at lowest level since 2004. What are your views on this fact? 

The IPO markets has traditionally followed a pattern wherein there is a lag period post secondary markets get going. This coupled with the fact that quite a few companies which were listed in the last three years are quoting below their offer prices have made investors cautious. I believe that perception and perceived value created during the IPO period need to have a continuity post listing with strong investor relations program initiated by companies after they get listed.

Do you see the IPO markets expected to revive in 2015 considering bullish sentiments across all market participants?

The pipeline for CY2015 is extremely healthy and with quite a few companies are planning to list as well as to have secondary offerings besides the disinvestment planned by the government. Private equity investors too are looking at exiting through the IPO window in a number of their investee companies.

What are reasons preventing companies to delay their plans to tap primary markets?

Primarily two reasons for delay in tapping capital markets for companies, one is the SEBI process and the second is the expected valuations matrix.

Do you see the insider trading regulations for non listed companies that have filed draft red herring prospectus with Sebi beneficial to retail investors?

SEBI regulations for insider trading, disclosures, monitoring of funds raised etc are definitely beneficial for retail investors and have been created keeping protection of their interests in mind.

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"With the perceived change in fortunes and the investment cycle, we are beginning to see companies coming forward and tapping the IPO market because they need growth capital".

V Jayasankar Senior Executive Director & Head of Equity Capital Markets, Kotak Investment Banking

There has been a good market rally in 2014, number of companies have even filed the DRHPs with Sebi but still they are finding it difficult to come up with the IPOs. What are the reasons that they are not coming up?

There is a lag between rallying the secondary market which we saw after the Modi government came into power and the pickup in the primary market. Because any primary market as you know takes atleast 3-5 months of preparation for a document before it is filed with SEBI, and then you do the marketing and by the time you come out with the issue, technically any issue would take 10-12 months of time. In a way, the corporate sector started gaining towards tapping the IPO market post the Modi government came to power, which is why I am now seeing issues coming on the primary market front. So you will see couple of IPO’s in March, you will see another 2-3 IPO’s in April and similarly in May, June, July you will see a continuous flow of 2-3 IPOs perhaps every month. It is a clear indication that the IPO season has began, and you will see gradual transactions into the market.

Apart for the regulatory frame work, is it a reason that the companies don’t require the capital and they just want to value unlock the investment?

There is a clear perception that there is a structural change in our Indian economy that we are going to see a multiyear growth happening now; we are noticing corporates reviving their investment plans, reviving their growth plans and making investments. Therefore, with the perceived change in fortunes and the investment cycle, we are beginning to see companies coming forward and tapping the IPO market because they need growth capital. The second set of companies that are hitting the market are those where PE investors must have invested for 4-5 years, you obviously need to give them some exit. While they may not be in a need to raise so much of capital, the fact that you need to give some kind of liquidity even by way listing. It’s kind of making some of the companies take the step of making some dilution in the form of shares and asking the existing investors offer for sale. So two kinds of companies, that we are seeing, has really come to the market. I think, in the third stage you will see the Infra companies. The power companies will become more attractive, when you will find that the power issues and coal issues are sorted. With government setting up Rs 70 thousand crores of investment in infrastructure, additional excise duty on petrol and diesel to build the highways and the railways, all the road companies will be benefitted. After some point of time when the coal auctions are done, the people will get confidence back in the power sector. They also know and realise that land can also be acquired. So this Land Acquisition Bill is also important so that it can enable its corporates to acquire the land for all these power plants. So gradually you will see even the infra companies and capital good companies coming to the market and raising money in the form of QIP or IPO but that will happen at a later stage.

Is there any connection between the number of companies raised the capital through the IPOs and following correction in markets?

I don’t think so. If you look at the FII investment in the country of six hundred billion dollars and if you add the domestic insurance companies and mutual funds which may be another three hundred billion, then we are talking about nearly a trillion dollars of institutional money into the market. If we look at the IPO size that is coming, five billion dollars of money is being raised in a country, then that’s probably not even one per cent of the overall institutional money in the market. So i don’t think that there is really corelational between the IPO money that is being raised and what is happening in the markets.

The market reacts to what is happening to the overall economy, and markets react to what are the prospects for certain sectors. And therefore, you will find certain sectors trade at a very healthy multiples, certain sectors probably do not get as much satisfactory multiples because of regulatory or some other issues.