India’s IPO Rally Is Stuttering And Valuations Are To Blame
In a year billed to the biggest for initial public offerings in India, the maiden issue of Nuvoco Vistas Corp. Ltd., one of the top five cement makers in India, barely managed to sail through.
The IPO was fully subscribed on the last afternoon of the three-day sale. It received demand for 1.45 times the shares on offer, and the portion set aside for high net-worth individuals, or the wealthy investors, was not fully subscribed. Its shares closed 7% below the IPO price on the first day of trading.
And Nuvoco Vistas' offer is not the only one where investors didn't make much on listing. Glenmark Life Sciences Ltd. offered muted debut gains, while Cartrade Tech Ltd. listed at a discount to its IPO price. The S&P BSE IPO Index, a measure of how stocks listed in the last two years have fared, has fallen more than 7% from the July peak.
That suggests the IPO rally is stuttering even as maiden offers, having raised Rs 60,243 crore so far this year, have seen the best start since 2018. Unicorns like One97 Communications Ltd., the parent of Paytm, and Oyo Hotels & Homes Pvt. are among the firms planning to go public.
As long as pricing is reasonable and listing-day gains are covering the interest cost of borrowing, investors will continue to subscribe the IPOs, Dipan Mehta, founder director at Elixir Equities Pvt. Ltd., told BloombergQuint over the phone. It all boils down to valuation and how IPOs are priced, he said.
Initially, the valuations were reasonable and that brought in wealthy investors who were chasing listing gains, he said. As subsequent issues were priced at a higher valuation, it shaved the debut gains and forced investors to withdraw from IPOs, he said.
It started with the Glenmark Life Sciences offer. People lost money and couldn’t even cover the interest cost, said Mehta. The stock debuted at a 4.3% premium and closed the day 3.9% higher than the issue price.
That too after the contract drug manufacturer’s offer was subscribed 31 times at close in July. The IPO received record applications of 34.06 lakh, including 11,934 from non-institutions—largely high net-worth investors, portfolio managers and alternate investment funds who often borrow money to invest in IPOs and chase listing-day gains.
CarTrade Tech's shares ended nearly 8% lower than the issue price on debut.
Interest from high net-worth investors has started falling in the one month with the number of applications for shares in the IPO declining.
Data provided by primedatabase.com indicates retail investor interest in IPOs has also started to decline. Within a month of the Glenmark Life Sciences offer, retail applications have fallen by half. Nuvoco did not even get 5 lakh applications from the category.
The slowdown in participation from the high net-worth and retail categories comes even as the markets added 1.45 crore demat accounts. New, younger investors logged onto mobile, online brokers and Fintech platforms to apply in IPOs to reap listing gains.
Investors will be back, Mehta said, if valuations are reasonable and gains are back on the table.