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IPOs: A lot has changed - Views on News from Equitymaster
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  • Feb 19, 2004

    IPOs: A lot has changed

    Going by the spate of IPOs that have been lined up, 2004 might well turn out to be the year of the IPOs. The last time such an event happened was in mid nineties, when a surge in demand resulted into expanded capacities, however the fundamentals supporting it were not strong enough and as a result, ended up eroding shareholder's wealth. However, we believe that things are a little different today and an investor has a much better chance of earning good returns as compared to the last IPO boom. Let's find out the reasons behind the same.

    The big ones...
    Company Estimated issue size (Rs bn)
    ONGC 110.0
    GAIL 19.0
    IPCL 12.5
    And the others...
    Company Estimated issue size (Rs bn)
    Dredging Corporation 2.9
    Bank of Maharashtra 2.5
    CMC 2.2

    Improved fundamentals: Backed by business friendly policies and cost reduction efforts, India Inc has cleaned up its act over the last few years and has emerged leaner and meaner than ever before. On the demand side, while the fast rising middle class and low interest rate regimes have ensured that the industries produce more, advancements in technology, especially IT and cheaper access to financial markets has resulted into higher shareholder wealth creation. However, relatively lower consumption levels compared to other developing nations and continuous striving for further cost reduction renders this as an opportune time for the investors to participate in the growth story.

    Better regulations: A large number of people who had invested during the IPO boom of the mid-nineties would not like to be reminded about it. Of the numerous companies that made offers to the public, only a handful managed to create wealth for its shareholders, while most of them just squandered the money away. This left a bitter impression in the minds of the investors, who chose to maintain a distance from such offerings and this resulted in the IPO offers drying up post that particular period. However, if the market regulator, Securities and Exchange Board of India (SEBI) is to be believed, things are different today. Saddened by the wealth destruction, it chose to take up action against errant companies and tightened the IPO norms. Over the years it has brought stricter regulations into play and has improved the disclosure framework. The move seems to be paying off as this time round the quality of the companies that have lined up for IPOs is seemingly much better than what was witnessed the last time such a boom happened. The list includes big-ticket names from the private and public sector as well as emerging companies that are believed to have a sound business model.

    Importance to retail investors: Petronet LNG, which would be one of the first issues to hit the IPO market has inserted an important clause in its offering, which if followed by other companies, would mark an important step in luring back the retail investors. The company has reserved 90% of its total issue for retail investors. This would not only ensure that value creation reaches to a wider section of the society but would also help in stock price appreciation as the Foreign Institutional Investors (FIIs), who of late have shown huge investment appetite, will be forced to access the secondary markets in order to pick up a stake in the company. Moreover, the government is also mulling the idea of adopting a differential pricing policy in companies where it is selling stakes, with a view to rewarding the retail investors by offering discounts. Such kind of retail investor friendly policies will definitely help in re-igniting his interest in IPOs.

    Therefore, if one takes into account some of the changes that have been listed above, it generates a feeling that things have definitely improved for the better. But this in no way alters the risk profile of equities. Equities have always remained riskier than other investment avenues and therefore valuations and the business model of the company should be the primary emphasis.



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