If ever there was a good time for Indian companies to hit the IPO market, it is now. Equity capital markets have been snowballing over the past few months and investor appetite is only showing signs of strengthening.
Names such as Equitas Holdings and Mahanagar Gas have been on the receiving end of hungry investors. The former racked up Rp22.5bn ($335.1m) in April after pricing its IPO — the first from a small finance bank — at the top of guidance. Mahanagar also priced at the top end, raising Rp10.4bn in June after securing a 65x subscribed book. And more recently this month, staffing solutions firm Quess Corp found its Rp4bn IPO 147x subscribed.
The subscription numbers are certainly exciting and while they show the rising confidence among investors, buyers are not drawn to every Indian stock. More than anything, the success of recent IPOs shows that bankers and issuers are quickly learning the best way to entice investors — by being practical in their approach to valuations.
Take Larsen & Toubro subsidiary L&T Infotech’s recent listing. The issuer left something on the table for investors when pricing its IPO last week, offering a 12x 2016 P/E valuation compared to its peers’ 13x 2016 P/E. Needless to say, the company drew enough demand for its float to be nearly 12x subscribed.
It’s this generosity that is wooing investors into transactions. So much so that investors have started showing interest in deals on the first day of bookbuilding, in some cases with books fully subscribed on day one. This is unusual in Indian IPOs, where more often than not orders are absent until a rush comes in at the very end of the process.
More importantly, recent Indian trades have been able to attract more than just institutional accounts. Retail investors, who typically drive the aftermarket in India and are viewed by bankers as more savvy than their counterparts in other Asian countries, have also been eager not to miss the boat. The retail tranche in L&T’s float was 7.4x covered, while Mahanagar Gas saw a similar number of orders come in.
The shift is down to the fact that issuers are somewhat tempering their valuation expectations and learning from the outcomes of some of the year’s earlier deals.
Many early IPOs saw the retail portion either undersubscribed or ending up with a relatively lukewarm response both in primary and secondary. HealthCare Global Enterprises, for instance, tumbled 22% in its debut in March after sealing a Rp6.5bn IPO that was priced at the top end. This was despite non-institutional investors only subscribing for 0.43x of their allotment and retail investors 0.83x.
Meanwhile, Parag Milk Foods had to extend the bookbuilding period on its May IPO and revise down the price range to pull in enough demand for the offering. It eventually raised Rp7.4bn, but also plunged 10% following its trading debut, with the final valuation viewed as aggressive by many.
In contrast, Infibeam, Equitas and Mahanagar are well above their issue prices, having offered a decent discount to investors in primary in a bid to keep the momentum strong in the aftermarket.
By offering a chance of attractive returns in secondary trading by being realistic in the primary stage, issuers are hooking every investor base.
Overall, investor sentiment in India’s equity capital markets is firmly risk-on and the window for issuance is open. And the good run should continue for some time as long as issuers stay disciplined and do not try to price at a level that could cost the market dear.