The IPO deluge, what next

If you didn't sell, nobody will buy.

- Philip Kotler

March 10, 2004, 2 PM: The Kotak Securities office in Mumbai's Bakhtawar building is overcrowded. The lobby on the first floor is buzzing with retail investors submitting IPO forms or enquiring about the latest offering. Meeting rooms on all the five floors occupied by Kotak's various financial divisions are booked.

Even the additional floor that the firm has rented out to manage the overload on account of primary issues does not seem sufficient enough. And Kotak is not the only one. All the major investment bankers' offices are busy coping with the largest supply of paper in recent history.

Sales made by the government - some residual stakes in erstwhile public sector companies plus direct offers in existing PSUs - alone have raised around Rs 15,000 crore (Rs 150 billion). That is more than the Rs 13,312 crore (Rs 133.12 billion) raised in the 1994-95 IPO boom making the amount raised in 2003-04 the largest in recent years.

Despite the large sizes of these issues, every single issue has been oversubscribed, making it amply clear that demand for primary offerings has been fairly impressive.

Who held the paddles
	Issue size (Rs crore)	Number of times oversubscribed
		Overall	QIB	HNI	Retail
IPCL	1221.45	4.90	8.70	0.80	1.30
IBP	357.00	2.80	4.30	0.80	1.80
DCI	224.00	18.11	23.15	16.77	9.35
CMC	192.84	10.60	16.46	3.32	6.18
GAIL	1647.75	7.33	NA	NA	NA
ONGC	10685.00	5.88	13.00	Undersubscribed
PTC	5.85	45.00	28.00	83.00	42.00
Petronet	390.00	4.30	2.00	4.00	10.50

But ask the skeptics. They would say oversubscriptions are fine, but what will happen to the market when these papers hit the secondary market? Stocks may come crashing, they say. To get a fix on whether the secondary markets can handle this fresh supply without cracking, we spoke to a cross-section of people - fund managers, investments bankers and brokers. Investment bankers, with their vested interests, declined to even suggest anything negative.

Surprisingly, even buy-side investment professionals are humming a bullish tune, though with a caveat - election uncertainties. If anything, the forthcoming General Elections will be the single most important factor defining the course of the stock markets over the next few months, they emphasise.

We asked market players four questions pertaining to the recent IPOs and their impact on the markets. Here are the expert views.

What kinds of investors have participated in the primary issues?

Marketmen say the IPO money has come from all quarters. Despite the initial hiccups the response to all the issues has been overwhelming. Investment bankers say the hit rate is 80 per cent. That is, eight out of every 10 prospective investors who were approached for putting money in these issues actually did so. In some cases, the hit rate was as high as 100 per cent. And much of this is genuine buying interest.

Says Ravi Kapoor, executive vice-president and head, equity capital markets, DSP Merrill Lynch, "Most major global investors focused on emerging markets and India have participated in the recent IPOs. The global institutional investors' response to these IPOs has been very positive." Adds Ajay Sondhi, vice-chairman and managing director, Kotak Mahindra Capital Co, "You think of the best names in the global fund industry and they are all here."

Sources say nearly two-thirds of the total institutional money has come from foreign institutional investors. The big domestic institutions that have bid aggressively are LIC, State Bank of India and GIC. UTI Mutual and other domestic mutual funds have bid modestly considering their smaller corpuses.

Among foreign institutions, there are three kinds. The first category includes regular investors in Indian equities - the likes of Fidelity, Janus, the government of Singapore, Capital International and Templeton.

The second category are hedge funds which have been active in the Indian markets over the last six-12 months. A number of these non-traditional but good quality funds have committed large amounts, say sources.

The third category is cross-over funds. "These are global funds which have global or regional mandates but have not yet ventured into the Indian markets before," explains Sondhi. Prominent cross-over buyers in this round of IPOs include Robeco, Gartmore and Swiss Re.

For most of these funds this is the first time they are investing directly in Indian equities. Investment bankers say the IPOs were a boon to new foreign investors. The roadshows for these IPOs helped increase awareness about India.

On the retail side, too, demand has been fairly satisfactory. "Apart from heavy subscriptions from high net-worth individuals, participation from small retail investors (under Rs 50,000 category) has been impressive, especially when one takes into account the fact that issues were bunched together, making it difficult for retail investors to apply in multiple issues," says S A Narayan, managing director, Kotak Securities.

Moreover, this time around even IPO financiers have not been very enthusiastic about funding. But when the retail momentum builds up, there is no stopping it (even though it ultimately proves to be their nemesis!).

Investment bankers admit that there is a virtuous cycle where people expect an issue to get oversubscribed and thus apply for a larger number of shares, which results in the issues getting oversubscribed.

What sorts of expectations have these investors come with?

Investments bankers say much of the institutional money is likely to stay. On one side are the regular foreign investors who have come in because they can buy large chunk of stocks without impacting market prices. The traditional funds in India fall in this category.

Says Ravi Kapoor, "Investors have found IPOs to be a very attractive opportunity to buy equity in fundamentally strong companies and have taken a medium- to long-term view on these stocks."

However, selling interest would arise from hedge funds, which have been notorious for all the volatility in the stock market over the last few months. These have relatively shorter-time horizons and are ever ready to jump ship. Arbitrageurs will dump their shares at their first chance.

On the retail side, some amount of selling will be inevitable. However, the fact that there hasn't been much retail financing this time around should keep markets more stable. The demand from retail investors has not been propelled by availability of easy finance, but from self-owned funds. These funds usually come from investors who believe that IPOs are safer bets than buying in the secondary markets. They are not keen on the first opportunity to exit, but will look for handsome gains from their issue prices.

Says Sunil Shah, managing director, HDFC Securities, "Since much of the retail money is self-owned funds, they will exit at a decent profit."

Do the largest participants - FIIs and large domestic institutions - have the liquidity and staying power to hold the markets up?

As mentioned before, two-thirds of the institutional money has come in from foreign investors who are likely to hold on to shares rather than dump them on listing. Last year, FIIs put in some Rs 30,000 crore (Rs 300 billion) into equities. This year, to date they have already put in some Rs 7,000 crore (Rs 70 billion) in the secondary equity markets apart from the money they have deployed through IPOs.

Even as global economists are expecting liquidity to tighten around the world any time now, they don't feel that emerging market allocation will suffer because of a liquidity squeeze. The US Fed's decision to keep its rates unchanged is a pointer that liquidity will remain easy in the short term at least.

As far as India does, the country is shedding its snake-charmer look and becoming a preferred investment destination for global investors. Whether it is coverage in foreign media or global fund manager conferences, India is getting a lot of favourable attention.

"In recent months we have seen very strong global interest in Indian stocks. There is no reason why the interest should disappear. It is naive to think that people will sell stocks and go away," says Sondhi.

What will really help the market hold up over the medium-term is the 'churn factor' - the fact that old investors will sell out and new ones will buy in. This is particularly true for FIIs. Says Sunil Shah, "The market is full of new buyers and old sellers. That explains the profit-booking we are witnessing now. For all of us who have seen shares rise 100 per cent, the temptation is to take the money and run fast but for someone looking at India afresh, there is still a host of opportunities."

During 1989-1990, when listed stocks in India had a market-capitalisation of just about Rs 1,00,000 crore (Rs 1,000 billion), primary issues raised Rs 2,500 crore (Rs 25 billion). With today's market-cap of over Rs 11,00,000 crore (Rs 11,000 billion), raising Rs 25,000 crore (Rs 250 billion) is no big deal. Especially since FIIs are more active now than ever before.

How much risk do current prices carry?

But all this does not mean there isn't any price risk at current levels. Stocks prices have been looking weak for the last couple of weeks, but many analysts say it is unlikely to come crashing - though volatility will continue due to the election factor. The saving grace, however, is that all the issues that have come in this time are of good quality companies. Will their prices hold above the IPO prices?

Some of the shares have indeed dipped below issue prices. For instance, Patni Computers closed at Rs 212 on Thursday, 8 per cent lower than its issue price of Rs 230.

As far as prices go, investment bankers are non-committal. "Something is worth what somebody is willing to pay," says an investment banker.

But few people have any doubts about the quality of the recent IPOs. Says Dr Subramanium, head of primary markets at Enam Financial Consultants, "All of them are good companies. It is not as though we got worms out of the wood."

Market players say the secondary market prices of some of the new issues were buoyant till recently as some institutions continued to buy shares from the market to complete their allocations, especially in stocks like ONGC. Going forward, stocks will move purely based on their fundamentals and general news. Companies like IPCL and ONGC and Gail look strong fundamentally. Favourable crude prices will hold up ONGC while a turnaround in petrochemicals will keep IPCL prices buoyant.

For other stocks like IBP, Dredging Corporation and CMC, there is nothing going particularly for or against them. They will get swayed by sentiments. Stocks like Power Trading and Petronet LNG may see prices rise on listing due to the latent demand. But a lot continues to depend on how sentiment holds up in the run-up to the elections.

Says Ravi Kapoor, "The markets will be choppy and are likely to be volatile in the run-up to the elections." The Sensex has already plunged lower than 5500 and volumes are thinning. Analysts predict that a Sensex level of 5000 is pretty much possible. Post-elections, however, the strong economy should be able to rev up stocks again.

Says Narayan of Kotak Securities, "Technology stocks could remain volatile or weak due to sentiments." And that would probably continue till the end of this year when the presidential election in the US gets over. Index heavyweights like Reliance have been weak due to portfolio reallocations in favour of ONGC in line with the revised weightages of the MSCI Index. Once the dust settles, these stocks should also move ahead.

One thing is clear: If at all anything does go wrong, one can't blame the IPOs. After all, the government holdings sold till now are worth Rs 15,000-and-odd crore - less than 1.5 per cent of the total market-cap on the bourses. So why bother? Dr Subramanium puts it aptly, "Markets never turn bad because of IPOs. It is usually IPOs which go bad because of bad markets."