IPOs To Improve Investors Portfolio Returns
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IPOs To Improve Investors Portfolio Returns
Lohit Bharambe along with Smriti Sahu bring on the table some interesting observations on the IPO markets in 2017 and explain why it makes sense to invest in IPOs from a strategic perspective
IPO MARKET IN 2017
What a year 2017 has been for IPO so far. The beauty of the IPO markets in 2017 has been the numerous quality issues rewarding the shareholders,thus boosting investor sentiments.
Actually, healthy IPO market has been a global phenomenon if we consider H1FY17. Improved economic fundamentals in developed economies has been instrumental for healthy IPO markets leading to impressive build-up of IPO pipelines.
As majority of global markets touched record highs in H1 of 2017, the global IPO markets have not made the headlines yet. With brightened investor sentiments and positive global outlook the positive momentum in the first half of 2017 is expected to continue in second half of 2017 as well.
The year 2016 was a good year for the IPO markets not only in India but globally as well. For Indian markets, the year 2017 promises to surpass the IPO market performance of 2016 on all metrics, including the number of issues and the sizes of issuances.
The equity indices trending upwards with low volatility has been the highlight of the year 2017 so far. The same can be said about the global equity indices as well. Ample liquidity backed by improving fundamentals in most markets were instrumental in impressive performance of IPO markets in 2017.
The first half of 2017 for the IPO market has been most active since the H12007 globally. In India as well, the IPOs in the first half have already surpassed the total issue sizes for FY15 and FY14 put together. To be fair only 6 companies hit the primary market in 2014 and 21 companies got listed in FY15. The years 2014 & 2015 will not be remembered as active years for the primary markets.
However, if we compare the issue sizes in H12017 with H12016, the IPO market has shown a growth of almost 93 per cent if we consider the data till June 2017.
So far in 2017, 16 companies have hit the primary markets and have managed to raise Rs.14,521.60 crore. With a promising pipeline of IPOs slated to hit the primary markets in 2H2017, the year 2017 promises to keep investors busy.
If we compare the performance with the peak years for IPO markets such as 2007 and 2008, the performance in 2017 stands impressive. Already in H12017, the money raised is equal to nearly 80 per cent of the total money raised for FY2008. However, the total money raised in H12017 stands at a paltry 33.5 per cent of the total money raised in FY2007.
We can safely say that the IPO market performance in 2017 is one of the best performances since 2007,i.e. since last 10 years.
OUTLOOK FOR SECOND HALF 2017
The outlook for equity markets in India is robust in spite of worries on disruption in markets owing to GST implementation.
On the global front, the markets continue to trade at all-time highs and are not showing any signs of correction even though the markets do look little fatigued at the top.
As far as primary markets goes, ample liquidity in emerging and developed market is visible and there is a healthy pipeline of candidates willing to get listed on major exchanges around the world, representing various sectors. The phenomenal performance of IPOs in 2017 has led to positive sentiment amongst the retail investors and that may lead to increased participation in H2-2017.
Benign interest rate environment, low volatility and higher stock market valuation is proving attractive for the companies to raise money, hence there is enough supply of new quality shares in the markets.
According to the EY Global IPO report, "In India, IPO appetite for small and medium enterprises in particular continues to grow due to strong valuations and positive returns, with the SME Board on the Bombay and National stock exchanges being one of the fastest growing stock exchanges globally.
Indian exchanges expect the second half of 2017 to be particularly strong with the government expected to raise close to US$3b via former SOE IPOs." GST disruptions in near to mid-term along with geopolitical tensions in Middle East, concerns over US trade policy changes and development in the UK over Brexit are the key risks for the equity markets in the second half of 2017.
Here is how IPO index has outperformed benchmark indices
Both the tables highlight the benefits of investing in IPO stocks post getting listed. We can see that IPOs in India post getting listed have delivered decent returns as reflected in the BSE IPO index performance. While the YTD returns for BSE IPO index stands at impressive 33.31 per cent the average returns for all the listed IPOs on main board excluding SME IPOs stands at 10.21 per cent. The IPO index has clearly outperformed the benchmark indices, including the small-cap and mid-cap indices. This goes to show the kind of outperformance an investor can enjoy if the right IPOs are chosen for investment. As a strategy, it may not be a bad idea to buy shares on the day of listing for those shares that have seen hefty oversubscription and retail investors are not happy with the quantity of shares being allocated to them.
CONCLUSION
Investors can closely look at IPOs that have seen good appetite from institutional investors. The Indian macros along with global liquidity will ensure plenty of opportunities knocking investors door. The global equity outlook is positive and supporting the positive momentum in Indian equities. The performance of IPO markets in 2017 so far has cheered investors in India and the participation in IPO markets will remain healthy.
It is observed that the promoters of several successful issue have left lot of value on the table for investors, unlike in several of the richly valued issues which were floated in the year 2007. The rewards of identifying right IPO to invest in are huge, as is seen in the performance of S&P BSE IPO index.
Investors may adopt a strategy of buy and hold on quality fresh issues, instead of selling the stocks on the day of listing, as it is seen that quality issues which list with a premium on issue price have a tendency to gain further ground outperforming the broader markets.
"Retail investors are often left with frustration for not getting allotment in an IPO. However, there is nothing to lose if one does not get allotment. There is always a good chance for investor to capitalize on the listing day. A worthy company usually gets listed at premium of 30-60 per cent on an average. This urges marketmen to sell the shares with fear of limited upside from current price, which gives a chance to the investor to buy at relative price as compared to upside potential in future. For instance, Avenue Supermart was listed at Rs.604 as against the issue price of Rs.299. Many believed that the upside will be limited to extent of listing price, and thus there was a 'sell' call in the market. The stock is currently trading at Rs.815 which is 35 per cent upside in less than 4 months."
Dinesh Rohira, Founder & CEO, 5nance.com
India has been particularly strong. The BSE and NSE and their SME markets as a whole led EMEIA by deal number. Indian exchanges saw 57 IPOs raising US$2.3b in H1 2017, a rise of 50 per cent and 91 per cent, respectively, compared with H1 2016. The year kickstarted with two landmark IPOs: Bombay Stock Exchange became the first-ever Indian exchange to list while Housing and Urban Development Corporation was hugely oversubscribed, making it one of the most demanded IPOs in more than a decade.
- EY Global IPO report .
Pranjal Srivastava Sr. VP& Head, Capital Market Products, ICICI Securities
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.
Vaibhav Agrawal Head of Research & ARQ, Angel Broking Pvt Ltd.
How do you think IPOs have performed in 2017 so far?
We believe that in 2017, the performance of the IPO market has remained satisfactory. This year so far, close to Rs.10,000 crore of funds have been raised through the primary equity offerings. This year, Rs.8,200 crore have also been raised by the Infrastructure Investment Trusts, which is a new instrument introduced in the Indian capital markets. These InvITs have also seen good interest from the investors. The IPO listings were mostly satisfactory and we believe that the quality of IPOs has also been good this year so far. One of the highlights of this year's primary market was listing of Avenue Supermarkets which gathered huge interest from the investors during subscription as well as upon listing. CDSL has also seen huge subscription. One of the main reasons for the good performance of IPOs this year has been ample liquidity and high investor confidence stemming from the fact the domestic macros are improving and economy is expected to do well going ahead.
Looking at current market situation, what strategy should be adopted by the retail investors for IPOs?
We believe that investors should stick to the business fundamentals and valuations rather than getting carried away by market liquidity, which may lead to investing in the poor quality IPOs. One should keep focus on the quality of the business, financial performance, scalability of the business model, promoter's background and valuation.
Will 2017 be a better year than 2016 for IPO investors? Your thoughts.
Yes, so far good quality IPOs have raised money in the markets, and looking by the trend, we believe that the performance of the primary market is likely to remain better this year as investor confidence has remained very optimistic. If macro data continues to improve, we expect that the IPO performance will remain healthy this year.
Vishal Purohit Co-Head- Equities, Prabhudas Lilladher
IPO markets are doing well in 2017. What would your advice be for retail investors who are aggressively looking at IPOs for investments this year?
The best way to play IPO is to invest in mid-cap funds and broad base the ride, rather than individual bets which can have limitations of liquidity, oversubscription and, most importantly, the quality of IPO one picks.
IPO allotment in retail category is done on pro-rata basis if IPO is oversubscribed. How does a retail investor improve chances of getting higher number of shares allocated?
The IPO process is standardised and one may get a 'left out' feeling, especially in oversubscribed issues, as finally the ratio determines the final allotees. A slight better chance one stands in largely oversubscribed QIB/HNI categories is to apply in all household names in retail category to at least stand a better chance from the ratio of oversubscription.
Why are we seeing so many IPOs hitting markets at this time? Does this indicate market top?
The IPOs are a function of strong domestic and FII liquidity. In the last 18 months, the domestic flows across mutual funds have been stronger as other asset classes like gold, real estate, commodities, debt markets, etc. all have had some issue or other. The increased transparency across economy is also helping push investors towards equities. The quality and vetting process and increased regulatory radar has helped the quality of companies coming out with IPO. As long as the rest of the economy has an increased level of uncertainty, IPO markets will have a good appetite of investment and I don't think it is a signal of market top.