Initial public offerings in India have been prompted not so much by genuine investor appetite for new listings but rather by a shortage of funding for business expansion, analysts say. The latest IPO, by a major jewellery retailer, raised $39m. Pia Heikkila reports
Tribhovandas Bhimji Zaveri (TBZ),an Indian jewellery retailer, is the latest arrival on the Bombay Stock Exchange.
The company is not short of ambition and wants to convince investors that all that glistersreally is gold by raising US$39 million (Dh143.2m) as it pursues an aggressive country-wide expansion.
But new babies inevitably have teething pains. Although TBZ's issue was fully subscribed, the majority of bids came in at the lower end of the price band at 120 Indian rupees (Dh8.25) to 126 rupees per share, according to data from the National Stock Exchange (NSE).
Market watchers say it was a damp squib of an initial public offering.
"The pricing just doesn't justify the business model. There were too many what-ifs in the prospectus," says P Phani Sekhar, a fund manager from Angel Broking.
He may be right.
"In the case of TBZ, because it's a jewellery company, the business is prone to gold price fluctuations and the stock is priced at premium. It seems that you are also paying a premium for their brand," says Raj Majumder, the founder and chief executive of Auroch Investment Managers in Bangalore.
But despite its bumpy start at the stock exchange, TBZ is not alone in braving the choppy waters.
In fact, there have been no fewer than six new listings in the past few weeks in India, fuelling talk of an IPO boom.
Market watchers say limited funding for market expansion is more often the reason behind IPOs rather than a genuine investor appetite for fresh offerings.
"Lots of these firms are testing the waters. On the banking side, liquidity is very tight. There aren't a lot of funds available, so they have a need for the capital, which makes them head for IPO," says Mr Majumder.
Many investors are also refusing to rush in because the pricing does not correspond to the company's real value.
"Retail investors have shunned the IPO market," says N Muthuraman, a co-founder of RiverBridge Investment Advisors.
"Investors are finding lots more attractive valuations in already-listed companies. They are unwilling to pay premium pricing [which typical IPOs expect] unless it has a novel story - like MCX, the first listed exchange in India."
But then, the Indian stock exchange differs from the more established markets in Europe and the United States.
Despite the huge size of the country and large number of businesses based in India, the market is relatively small. It also moves slowly, and new share issues are usually dominated by government spin-offs.
"Indian market is unique," says Mr Sekhar. "The very basic composition of Indian IPO market is different too, as the government paper dominates new issuances.
"Then there are large family-run businesses, and their fundamentals are different. On the whole, we are still taking baby steps, but we are going towards sharing our wealth, but it will take time."
Although many state spin-offs such as NTPC and Power Finance were seen only as moderately successful, over-pricing has led to investors losing money in recent issues of state-run companies.
The new entrants represent a wide variety of sectors, and there is no specific one that is in vogue with investors.
"Towards the actual launch of a new company, you see a lot of enthusiasm, but in the end, only well-run and good companies are being picked," says Mr Majumder. "For a good company, there is money to go around."
Mr Sekhar tends to agree with that view.
"The retail participation in particular has been tepid because recently, no one had made enough money. You need good valuation and strong position to attract the retail investors. The high-net individual too will only invest if it's a fireproof stock. They will pile up to the issue only if it looks like it will be a winning horse. They are not risk takers," he says.
Pricing is also an issue, and many newcomers tend to have overly optimistic views on their pricing, causing investors to lose their cash.
"Lots of promoters of recent IPOs have been greedy," says Mr Muthuraman. "They have priced the IPO at exorbitant valuations, with suitable window dressing with the company's latest financials.
"At the same time, these companies spent considerable money to market the IPO, to make it 'successful', but within six months of the initial listing, over 80 per cent of these IPOs have traded below the issue price." TBZ may not offer a pot of gold at the end of the rainbow, but the time for gems will come, analysts say.
"The investor sentiment is still mixed, there are political issues that create unease, and it may take a while before the mood turns more optimistic," says Mr Majumder. "The recent policy rate cut should again set India on a growth path."
Mr Muthuraman believes the next few years will be crucial.
"With markets being ambivalent for long period of time, promoters are not keen to divest at low valuations. But in my opinion, IPO market may show brisk activity only in later half of 2013 or 2014," he says.
Slowly, slowly seems to be a mantra that works in India, as elsewhere.
"India is the same as any growth market - even in a market that is performing well, investors need to be lucky to make money [in] two to five years," says Mr Sekhar.
Analysts also offer a word of caution for those new in the game.
"Investors should not get carried away by market frenzy and stories in business channels," says Mr Muthuraman. "Valuations come down to normal levels after the ad blitzkrieg stops. The SME exchange could be attractive as the market is relatively new and promoter expectations may be moderate here."
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