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The coming IPO boom

January 05, 2004

Even as the Sensex shows no signs of losing steam, 2004 may well turn out to be the year of great IPOs.

But keep your fingers crossed: some of them depend on the markets holding up strong. If all goes well, one could see a number of big names hitting the bourses with their primary issues.

According to data provided by Prime Database, a Delhi-based firm tracking primary markets, five small-sized issues are waiting to hit the market with Sebi approval in hand, 10 have filed applications with Sebi and are awaiting approval, and 131 others are actively talking about issues.

The grand total of these 146 issues amounts to Rs 47,302 crore (Rs 473.02 billion), assuming an issue size of Rs 100 crore (Rs 1 billion) each for the 56 issues, which are yet to disclose that figure.

That is obviously a great opportunity. And out of this long list of companies many are common household names -- New Delhi Television, Shoppers' Stop, Barista Coffee, Jet Airways, Reliance Infocomm, MTR Foods, National Insurance -- and the list goes on.

The sun is just rising for IPOs

Issue size (Rs cr)

Issue size (Rs cr)

Likely this year




Reliance Infocomm


Nimbus Communications


Tata Consultancy Services


Datamatics Technologies


Bharat Petroleum Corp


Lord Krishna Bank


Gail India


Mahanagar Gas


Oil & Natural Gas Corp


Mahindra-British Telecom


Indian Oil Corp


Paras Pharmaceuticals


Indian Petrochemicals Corp


Andhra Bank


Bharat Aluminium Co


Development Credit Bank




B4U Television


Videsh Sanchar Nigam


Bank Of Maharashtra


Hutchison Max Telecom


CMS Computers


Idea Cellular


Curls & Curves India


National Aluminium Co


Friends Globe Travels


New Delhi Television


Punjab & Sind Bank




Rashtriya Chemicals & Fertilisers


Guru Govind Singh Refinery


Shoppers' Stop


National Fertilizers


State Bank Of Mysore


Biocon India




Central Bank Of India


Bharat Sanchar Nigam


Eskay K'N'It (India)


National Thermal Power Corp.


Petronet LNG


National Hydroelectric Power Corp.


Dredging Corporation of India


Power Grid Corp.Of India


Punjab National Bank


Rural Electrification Corp.


Shantha Biotechnics


Power Finance Corp.


Future Software


Power Trading Corp.Of India


Godrej Sara Lee


AB Corp.


The list includes only companies which have disclosed the issue size, and sizes above Rs 100 crore. 

(Source: Prime Database)

That's the comfort factor: unlike the IPO boom of the early nineties -- when unknown companies made off with untold millions of investor money -- the public issues coming up now are from more stable and reliable companies.

The primary markets have been in tatters for a long time. Despite rapid-fire moves in the secondary markets in 2003, primary issues didn't see the kind of surge one would have expected.

According to Prime Database, only 15 public issues hit the market and raised a meagre Rs 2,172 crore (Rs 21.72 billion), compared to 2002 when six IPOs (out of which four were from banks) collected Rs 1,981 crore (Rs 19.81 billion).

Further, over the last six years (1998-2003), only Rs 10,202 crore (Rs 102.02 billion) were mobilised through public equity issues, which is 27 per cent less than the Rs 13,887 crore (Rs 138.87 billion) that were mobilised in just a single year 1995.

But all that is history. Says Prithvi Haldea, managing director, Prime Database, "Companies with a collective issue size of Rs 30,000 crore (Rs 300 billion) have been waiting for years to float IPOs."

Yes, that number has been doing the rounds for quite some time, but today, it looks more real than ever before.

Says Ravi Kapoor, head -- equity (capital markets), DSP Merrill Lynch, "Year 2004 could be potentially good for the primary markets and I expect about $2.5-3-billion (Rs 11,250-13,500 crore) of issuances in the market."

The recent upturn in the primary markets is the result of a combination of factors.

These factors include the government's decision to take the IPO route to dispose of its residual stakes in companies which have already been privatised, the corporate sector's need for funds for expansion and private investors looking for exit options.

There are examples of all kinds. Public sector companies like Gas Authority of India Ltd, Power Finance Corporation and National Thermal Power Corporation want to raise capital to expand their businesses.

Similarly, banks like the Central Bank of India and the Punjab and Sind Bank want to raise capital to meet capital adequacy norms.

Besides, the government is planning to sell its residual stake in companies such as VSNL, CMC, IPCL, IBP and Balco, which have already been privatised.

"Since the controlling stake has already been transferred in these companies, it makes sense to divest the residual holding at a decent price. Besides, cross-holdings amongst public sector oil and gas companies could also get offloaded into the market," says Kapoor.

On the other hand, private companies like Tata Consultancy Services are simply seeking a listing to unlock existing valuations while some others like Hyundai and LG may have to do so to comply with FIPB regulations. Another compelling reason is to give an exit option to private investors.

Says Kapoor, "This is evident from the fact that in many of the recent issues like Divi's Labs, Indraprastha Gas and TV Today, private investors are offering to sell their stakes as well."

Companies like UTV and Secure Meters are examples of venture capital companies seeking an exit option, points out Haldea.

Similarly some others like Biocon and NDTV may want to raise additional capital for expansion while at the same time providing existing investors an opportunity to exit.

Over the last two-three years, private equity investors have taken huge stakes in companies engaged in technology, media, telecom and pharma sectors. With many of these investments maturing and the markets well poised, these companies may be seeking exits.

Evidently, the quality of issuances this time around is likely to be far superior to the one witnessed earlier.

But the pricing of many IPOs may also be steep, considering the exuberant mood in the market. That's where investors need to be choosy in picking the right stocks. So how should retail investors play the IPO game?

IPO strategy
Buy and hold or sell on listing?
Experts say that one must be clear whether one wants to simply participate in a public issue or genuinely invest in a company coming up with a primary offer.

Given that most IPOs floated over the past couple of years have given phenomenal listing gains, investors are tempted to invest in IPOs with a view to selling the stocks on listing. Cool idea. But then, it comes with an inherent risk.

Between the time the issue closes and its listing (a gap of nearly a month), the market sentiment could change and new listings may not always list at a premium.

In fact, if the market turns unfavourable, the listing price could even be lower than the issue price.

On the other hand, if the market is buoyant, the stock could even list at unreasonably higher prices either because IPO financiers (brokers) try to push up prices to find favourable exit levels, or because applicants who didn't get allotment go on a buying spree.

In both the cases, the spikes in prices may be artificial and, hence, it makes sense to exit.

Looked at another way, a buy and hold strategy worked wonders last year. As the markets surged ahead, one would have profited more by holding on to stocks than by selling on listing.

For instance, Maruti, which was issued at Rs 125, hit a high of Rs 156 on the first day of listing but ended the year at Rs 375, a gain of 200 per cent over its issue price.

However, its rise was driven by bullish market sentiment apart from its dramatic performance turnaround in the second half of the calendar year.

This need not be true in 2004. Generally, companies that hit the market in overheated conditions tend to underperform because they are invariably priced aggressively. But then, even that is a function of how well the markets perform overall.

So the decision to hold a stock or sell should depend on your own return expectations and assessment of valuations of the stock. In that sense, a buy or a sell decision in an IPO is identical to that of any other stock in the secondary market.

Where to invest
IPOs by listed companies may not be great ideas.
A number of listed companies, including some public sector banks, will be coming up with issues to raise capital. These may not good buys if you are looking for listing gains.

In fact, some of the stocks see sharp increases in prices because of low floating stock and their valuations may be higher for the same reason.

Additional issues in such stocks are unlikely to push stock prices higher. They would only help in correcting the valuation gap created by the lack of adequate float.

New themes should be favoured. The IPOs that one must not miss are the new themes, which do not find representation in the stock market currently.

For instance, there are only two retail companies listed in the market today. So a Shopper's Stop should be a welcome issue. Similarly, there are some BPO players. Ditto with NDTV, which runs the most popular English news channel in the country.

And then, there are mega telecom issues like Reliance Infocomm and Idea Cellular, which would be tough to avoid. Here are some issues (which in all likelyhood will hit the market this year) should not be missed.

Television broadcasters NDTV and SET India (Sony) need no introduction. A production house turned broadcaster NDTV launched its own news channels -- NDTV 24X7 (English) and NDTV India (Hindi) -- in April 2003 after its contract with Star India came to an end. Led by Prannoy Roy of 'World this Week' fame NDTV's English news channel is touted as one of the most popular.

Sony is number two in the Rs 10,000 odd-crore broadcasting market and reaches 35 out of 44 million cable homes in India.

The Sony bouquet, which includes its own channels like Sony, MAX and AXN, and the likes of NDTV, HBO, Animal Planet and Discovery, has a market share of 9.92 per cent. (Star India is the leader with a share of 15.78 per cent.) Last year, the company clocked sales of Rs 850 crore (Rs 8.5 billion).

BIOTECH: Biocon & Shanta
Biocon is India's leading biotechnology company. More than 25 years old, it applies proprietary fermentation technologies to develop biomolecules in diabetology, oncology, cardiology and other therapeutic segments.

With successful initiatives in drug discovery, clinical development, bioprocessing and global marketing, Biocon delivers products and solutions in over 50 countries.

Biocon has chosen diabetes disease research as one of its key focus areas and has embarked on a longitudinal research programme in Type II Diabetes to pursue novel biomarkers and new drug targets.

Biocon's Syngene unit has 150 scientists working on drug discovery, chemical synthesis, molecular biology.

Shanta Biotechnics is credited with the development of India's first indigenous r-DNA-based hepatitis B vaccine. Shanvac-B, the company's first product, is the largest selling Hepatitis B vaccine (in volume) in the country.

Shanta has also indigenously developed Interferon Alpha, an anti-cancer drug. The company has an alliance with global pharma firm Pfizer for marketing its products.

TELECOM: Reliance Infocomm
Reliance Infocomm, which houses the Reliance Mobile business, is the largest mobile operator in the country with a subscriber base of 5.8 million, including both its CDMA and GSM subscribers.

Within 12 months of launching its service Reliance Infocomm has won over roughly 21 per cent of the total 28 million mobile users. The company is expected to break even this fiscal.

It expects to have more than 25 million subscribers by the end of next year when the total users in the industry should be around 40 to 50 million.

BPO: Daksh e-services
Daksh is a leading provider of BPO services to Fortune 500 companies in the areas of transaction processing and customer care services.

The company has a robust state-of-the-art infrastructure spread over five facilities in India, of which four are in Gurgaon and one in Mumbai.

The company will soon be adding a global disaster recovery location in Asia Pacific. It currently employs around 6,000 people.

RETAIL: Shoppers' Stop
With retailing picking up rapidly in India companies in the segment should see exponential growth, say analysts.

Shoppers' Stop is India's first retail chain with outlets in Mumbai, Pune, Bangalore, Delhi, Hyderabad, Jaipur, Chennai and Kolkata. It offers a complete range of garments and home accessories.

More than 25,000 customers walk into Shoppers Stop every day. It is the only retailer from India to become a member of the prestigious Intercontinental Group of Departmental Stores.

The Tata-owned TCS is the largest Indian software services firm. With more than three decades of experience in diverse areas of industry and commerce, TCS offers end-to-end strategy consulting and system integration services to Fortune 500 clients across 55 countries.

With over 100 offices in 32 countries, TCS employs 24,000 consultants and has 100,000 man-years of experience. It posted revenues of Rs 5,012 crore ($1.04 billion) in 2002-2003.

Three rules to follow

Rule 1: Set aside money for important issues If the IPO boom takes take off as forecast by experts currently, at least one IPO could hit the market every fortnight. Obviously, one cannot invest in all IPOs given the monetary constraints. So investors need to plan IPO investments in advance so that one does not miss important issues.

Rule 2: Get a sense of possible oversubscription before applying Before investing in an IPO it is crucial to know approximately what kind of response an IPO could get or how many times it could get oversubscribed. Because it is the level of oversubscription that determines how many shares you are allotted. If the demand is too much (say, over 50 times), it may not be worthwhile applying for the issue because your chances of getting shares may be quite slim. In the meanwhile, you may have to forgo other opportunities if your funds are locked up in application.

Rule 3: IPO financing is critical When demand is high and supply is limited, the only way you can increase the chances of success in the IPO game is by getting your applications financed. Most banks are willing to finance up to 60 per cent of the IPO application amount (40 per cent margin). Interest rates on IPO financing schemes range from 14 to 16 per cent. The idea here is to bid for a large amount because you will end up getting much lower allotments than what you applied for, depending on the level of oversubscription.

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