Click and bait

The strategy to entice investors with underpriced IPOs to offer richly-valued FPOs going ahead can backfire

What the slashing of the corporate tax did to the secondary market, the IRCTC IPO has done to the primary market. The cloud of pessimism has given way to giddy euphoria. If the flight of foreign investors slowed down in the aftermath of India’s transit to a competitive economy with a 22% peak base rate, the more-than-100-times subscription and over cent-per-cent listing gain, a rare feat for a PSU, dispelled the myth of a liquidity crunch. Overseas and local investors’ appetite for Indian paper was amid, or despite, a flurry of downward revision of growth projections by domestic and global institutions for the current and the next fiscal year. The market is sentimental but practical. The Indian Railways’ catering and online booking provider and tour operator was sought after not only for its monopoly but also for its impressive core performance. Such debuts are rare. The last one that was greeted with a similarly rapturous reception was in 2017. Since then, the enthusiasm has partially evaporated save for exceptions such as IndiaMart InterMesh, a B2B e-commerce platform that was 36% oversubscribed, opened at 34% over the offer price and has returned 48% in the four months since then. Leadership position of a company is a strong motivator for investors to part with their money. The concern is sustainability.

The rise and fall of MTNL is a chilling reminder of how fortunes of in-favour themes can deteriorate on changes in the composition of the market and government neglect. The IPO of BSNL, the government-controlled supplier of telecom services, except to Mumbai and Delhi, did not materialize. Instead MTNL will become a listed subsidiary of BSNL in a mega merger. VSNL was a crown jewel before it was completely absorbed by the Tatas in February 2008, six years after buying a 45% stake. The stock has shed half of its value at the current market price. Air India’s descent accelerated after the sky was thrown open. The problem once again was cannibalization of the business by new-age operators and indifference of policy makers. Slowly but surely IR is being dismantled. Private players can operate freight and some passenger routes. What needs to be seen is if the latest success story will consolidate and continue to create wealth for the shareholders like Avenue Supermarts or fizzle out like Astron Paper and Board Mill and Career Point, among the few whose collection exceeded 100 times the issue size.  When the operator of offline retailer D-Mart entered the market, doubts were raised about its dated business model despite its conservative approach to cash management. Digital marketplaces were gaining popularity. Departing from the favorable view of businesses with asset-light model, the market found virtue in owned outlets in prime residential localities, a hedge in a worst-case scenario. Justifying the confidence, the grocer has appreciated 85% in over 32 months.  The diluted EPS has expanded 74% in four years. In contrast, struggling Flipkart was bought lock-stock-and-barrel by Walmart. Amazon has to be satisfied with 51% multi-brand FDI cap.

That the stunning performance of Avenue Supermarts and IRCTC will encourage sound companies to raise capital even in a hostile market will be a welcome outcome. What is not is the unease about discovery. Book-building is undertaken to assess demand from long-term institutional investors, who balance the past with the outlook. The process aims to eliminate over- or under-pricing. A manageable contribution sees securities getting credited in the demat accounts of most participants. The modest payoff on debut attracts new investors. There is no hurry to tap the market. It is puzzling how investment bankers could be so horribly out of tune with the mood on the street in determining the offer band. Besides undermining the proportionate allotment model, the exercise has turned into a lottery for speculators looking to book quick profit. A lower valuation restricts capital expenditure or debt clearance, affecting growth plans. The recipe to entice investors with a discount to come out with richly-valued FPOs going ahead can go wrong if earnings do not keep pace with the enlarged base. The Astrom Paper and Board Mill IPO mopped up more than 240 times the issue size. The 58% opening advance end 2017 has slumped to about 15%. In retrospect, the cautious approach of Avenue Supermarkets seems justified. The promoters were diluting their stake to stay listed through issue of new shares. The premium was accrued to the company for de-leveraging. The railway ministry has short-charged tax payers funding the enterprise by agreeing for below-par collection. The government will get the entire proceedings of the divestment. Benefits to IRCTC, if any, going ahead are uncertain if does not turn into another MTNL in the meantime.  

-Mohan Sule