• JULY 16, 2001

IPOs: A year of misfortunes

The year 2001 was a year most retail investors would love to forget and it was no different for primary markets as well. While year 2000 was marked with a number of software issues, FY01 was totally different. We take a closer look at the primary market in 2001.

The IPO market in FY01 was dominated by telecom, media and interestingly, the banking sector. Issue proceeds from telecom companies increased sharply primarily on account of freeing up of regulations (NLD as well as basic telephony services). Though the book building portion of Hughes Tele.com, the basic service provider in Maharastra and Mumbai, received a good response, the fixed portion was underwritten by the lead managers. Total mobilisation from telecom companies has touched Rs 9.2 bn compared with 0.8 bn in 2000.

The tightening of regulations by the Reserve Bank of India (RBI), disinvestment of PSU banks mooted by the government and consolidation also resulted in substantial rise in banking IPOs in 2001. Though the number of issues from banking and financial institutions (clubbed together) has gone up by 27%, total funds mobilised has fallen by 14%. Since majority of such issues were from PSU banks, they were priced at par and the average issue size has also declined (32%). This resulted in lower issue proceeds. The TMT hype also created frenzy amongst investors about the prospects of media companies. Balaji Telefilms, Mukta Arts, Mid-Day, Creative Eye and Tips Industries successfully tapped the IPO market and received good response from investors despite high premiums.

TMT dominates
(% change) No. of issues Money mobilised
Telecom 100.0%1129.5%
Media 550.0%255.2%
Finance 233.3%254.0%
Engineering 0.0%130.1%
Total 62.4%-21.6%
Banking/Fis -13.3%-22.3%
Plastic 0.0%-42.4%
Info. Tech. 147.2%-48.1%
Electronics 33.3%-67.4%
Cement -33.3%-75.6%
Misc. -28.6%-80.3%
Chemical 25.0%-82.6%
Health Care -42.9%-91.7%

Software companies however, were the worst affected. The impact of technology meltdown is apparent from the issue proceeds by information technology companies. Total issue proceeds has come down sharply by 48% to Rs 8 bn. However, the number of issues from such companies have almost doubled to 89 issues.

If one were to view the IPO market as a whole, total issue proceeds and number of issues from the primary market in FY01 have gone up by 62.4% and 62.1% respectively. Though the number of issues has gone up from 93 in FY00 to 151 in FY01, total issues proceeds via IPOs have come down by 14% to Rs 53.8 bn. But rights issues have registered sharp growth. Total money mobilised from rights issue stood at Rs 73 bn as compared to Rs 27 bn in 2000.

Contrasting trends…
(Rs bn) FY00 FY01   FY00 FY01  
  No. of issues Change Money moblised Change
Public  65.0 124.0 90.8% 62.6 53.8 -14.0%
Rights 28.0 27.0 -3.6% 15.6 72.9 367.5%
Total 93.0 151.0 62.4% 78.2 126.7 62.1%

As bigger companies postponed their ambitious expansion plans in light of lacklustre primary markets, smaller companies, notably the software ones, continued to tap the primary market. This is apparent from the trend in average issue size in 2001. While IPOs with the average size of less than Rs 50 m has gone up substantially by 254%, IPOs in the range of Rs 1 bn to Rs 5 bn have fallen by more than 50%.

Smaller Issues dominate…
(% change) Money mobilised
Less than 50 m 254.0%
50 m to 100 m 57.3%
100 m to 500 m 21.4%
500 m to 1 bn -49.1%
1 bn to 5 bn -30.5%
More than 5 bn -11.9%

Given these facts, will the IPO market revive in 2002? Prospects are rosy. Rights issues are once again expected to be in the limelight in FY02. A number of companies including Arvind Mills and Telco are waiting to tap the market to retire their high cost debt and restruture their businesses. Besides, the opening up of the economy has imposed new challenges on the manufacturing majors, which means that either the domestic major shape up or shut shop.

Public issues are expected to receive a new lease of life in the second half of FY02. As the secondary market has shown positive trend in recent weeks in light of better than expected performance of software companies (though the sustainability is still under cloud), the 'feel-good' factor might once again return if the economy performs well. The recent telecom issues are just a tip of an iceberg. Majority of these companies have postponed their IPO plans due to adverse market conditions caused by the technology meltdown and the securities scam. However, they might return in the second half of the current year. But will things be any different at that time or will retail investors be slaughtered once again is anybody's guess?

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