IRCTC High: Sluggishness in the IPO market is unlikely to end soon

The initial share sales by the Indian Railway Catering and Tourism Corporation (IRCTC) brought an early Diwali to Dalal Street, with the monopoly railroad travel service provider’s mid-October listing turning out to be the second best since 2005 and a closing debut eclipsing records dating back to a period before the subprime crisis.

In its blockbuster market debut, IRCTC’s stock listed at Rs 644 on BSE and Rs 626 on NSE against the issue price of Rs 320. The stock closed 127.69% higher than its issue price at Rs 728.60 on BSE and 129% higher on NSE.


At first glance, it may appear that initial public offerings (IPOs) are back in favour, but several other points suggest that the current period of weakness in the IPO market is unlikely to end soon. Analysts say the availability of several quality stocks at much cheaper valuations in the secondary market has led promoters and private equity funds to postpone plans to list shares. But quality companies such as IRCTC, offering shares at the right price point, would find good demand.

“A number of quality stocks are available at cheaper valuations in the secondary markets, giving investors enough ideas,” says Gopal Agrawal, co-head, investment banking, Edelweiss Financial Services. “Subdued valuation has also led a lot of companies to defer their IPO plans.” Fund raising through IPOs in 2019 will likely be the lowest since 2014. This year, 14 companies have raised about Rs 11,300 crore so far, compared with Rs 31,000 crore by 24 companies in 2018. In 2017, 36 companies raised a record Rs 67,150 crore.

“I don’t think the IPO market will see a flurry of issues in the near term because of IRCTC’s success, which is a one-off case,” says V Jayashankar, head of Kotak Investment Banking. “However, quality companies that have got their pricing correct have seen decent investor traction in the past, such as Affle (India), IndiaMART InterMESH and Metropolis. That trend will continue.”


Nipun Goel, head of investment banking at IIFL, says a lot of volatility in the market, driven by a raft of local and global factors, has affected IPOs. The other two avenues of fund raising – infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have yet to take off in the Indian markets. Only five InvITs have raised about Rs 3,258 crore in the last three years, and just one REIT was able to raise Rs 3,874 crore so far.

So Far, So Good

Almost all IPOs launched in 2019, except MSTC and Sterling & Wilson Solar, have given handsome returns. IRCTC and IndiaMART InterMESH stock prices have doubled, while others have given 12-80% returns. The Affle (India) stock has rallied 57% over its offer price since August, while Metropolis that listed in April has given a return of 45%. However, of the 57 IPOs launched in 2017 and 2018, 35 are currently trading below their offer prices. “With roughly 50% of the IPOs launched in 2018 giving negative returns, tighter IPO pricing is key for successful IPO closures in the current environment,” says Agrawal. Only a dozen draft red herring prospectuses (DRHP) were filed with the market regulator Sebi in 2019, compared with 90 in 2018. Currently, 33 companies have received the regulatory nod to raise about Rs 30,000 crore, and approvals for those plans are still valid. Bajaj Energy, PNB Metlife India Insurance, Shriram Properties, AGS Transact Technologies, Sansera Engineering and Emami Cement are among the bigger companies likely to hit the primary market in the next six months. Several companies that have got Sebi approval for IPOs are in a wait-andwatch mode, given the volatility in the secondary market.


IPO financing was a factor in the 2015-18 hype in the stock market. Several issues saw huge oversubscription. With 10 IPOs, launched in 2018, having opened flat to negative, demand for IPO financing is subdued of late. This, coupled with liquidity issues, has led to non-banking financial companies not providing adequate IPO financing. Most bankers expect only select IPOs and private placements. Also, investors are waiting for the secondary market to find the bottom before escalating their commitments to the primary market. “News from domestic industry and global trade continues to be challenging and will limit any meaningful fund raising,” says Ravi Sardana, executive vicepresident, ICICI Securities. “Many issuers will look to refile their offer documents with revised issue sizes and wait to launch when there is an improvement in the market sentiment.”


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