Before 2010, the last time a deluge of IPOs hit the market was in 2007. The scenario then was the same as that in 2010; stocks had risen considerably, sentiments were bullish and so companies wanted to take advantage by launching one IPO after another. But that is where the similarity ended. If one were to compare the IPOs in both these years in terms of performance, then the ones last year took the mantle by a mile.
That is not to say that all the issues during both these years did well. There were some duds too. But overall, according to the ETIG study, around 33% of the companies that issued IPOs in 2010 are trading at a level higher than the price at which they sold shares. This figure was even lower in 2007 when just 20% of firms listed that year generated positive return for shareholders. One of the reasons that could be attributed to this is the large number of public sector IPOs this year in which the government was looking to divest its stake. None of the PSUs were looking to raise resources as they are already cash rich. This exercise was more an initiative on part of the government to augment its revenue streams. And because it wanted robust response from investors, the issues were reasonably priced.
This is in stark contrast to IPOs issued by private players whose purpose was to either raise funds for capex or retire debt. These issues were aggressively priced and hence evinced tepid response from investors. That is the reason why most of the IPOs in 2007 turned out to be damp squibs as companies and i-bankers got lured by the prospects of higher valuations. And hence many of these issues were ridiculously priced. The heightened optimism then meant that investors also jostled to ensure that they got a share of the IPO pie.
In that sense 2010 was a bit different. In that the investors had become a lot savvier. After the severe meltdown in the stockmarkets at the height of the crisis, investors by and large were not keen on burning their fingers once again. And hence they were choosy while picking IPOs.
Companies that are looking to list on the bourses in the future would do well to keep in mind that reasonably pricing issues goes a long way in ensuring greater investor participation and consequently higher return to shareholders. This is of course taking into consideration that the business prospects are good and the management strong. One need look no further than the IPOs of public sector firms to realise this. Indeed, with more public sector company IPOs lined up in 2011, it will be interesting to see how the scenario pans out this year.