To Market, To Market

In a country where the fortunes of its cricket team can make the difference between national mourning and ecstasy, it's no surprise that one successful initial public offering (IPO) has revived interest in primary markets. The current bullish phase in the secondary market has helped too. Together, it has led to a flurry of activity among merchant bankers and corporate managers who have revived numerous public issue plans in limbo for a long time.

That wasn't the case a few months ago. When Maruti Udyog was gearing up for its IPO, its advisors, led by Kotak Mahindra, thought it would be wiser to postpone it. The floor price—Rs 115 for a Rs 5 share—seemed way too high. Undaunted, MUL MD Jagdish Khattar went ahead with the roadshows, the deceptively glamorous name given to a back-breaking schedule of 128 one-hour meetings with investors over 20 working days. The 13-time over-subscription of the issue was also music for those who were thinking of raising money from the public.

Suddenly, after the Sensex zoomed by over 20 per cent in the past three months, everyone's saying it's the right time to tap the market. So much so that Akhil Gupta, the joint MD of Bharti Enterprises, which floated its IPO last year, says he has just one regret about Bharti's timing: "The subscribers didn't see their wealth grow right after it." Read between the lines, it means Bharti's shareholders, who had to bear a sharp dip in the share price post-listing, would have been much happier if the issue was floated around this time. Thus, the two-word advice of Prime Database MD Prithvi Haldea to IPO aspirants: "Be quick."

That is precisely what a clutch of psus, with more than a keen helping hand from disinvestment minister Arun Shourie, are attempting. The lineup includes biggies like IOC, BPCL, ONGC, NHPC and NTPC, and the PSUs together may raise Rs 9,960 crore. Then there's Shourie's intent to sell the government's remaining—in market-friendly terms, residual—stakes in the already divested psus: VSNL, CMC, BALCO, IBP and IPCL. And the success of four bank IPOs in the last two years means this sector isn't to be left behind. The list of those considering IPOs includes 14 banks whose plans include raising Rs 1,865 crore.

The private sector has been dormant for years in the IPO context. But the changed scenario could spell an end to that phase. The IPO wannados' catalogue here is adorned with the two largest unlisted software powerhouses, Tata Consultancy Services (planning the largest IPO in India's history: Rs 3,000-4,000 crore) and Patni Computers, both of which have announced all but the timing of their issues. Others could be media firms like Star TV, B4U Television, NDTV and SET India or telecom companies like Idea Cellular, or BPO firms like Daksh and scores of others like HFCL Infotel, Barista, Biocon, Indraprastha Gas, Shoppers' Stop, Godrej Sara Lee and Mahindra British Telecom. The proverbial dark horse could be Reliance Infocomm, which may come out with an issue that's larger than TCS.

Haldea says nearly 100 IPOs are in the pipeline and the amount raised could touch Rs 22,000 crore. But one needs to take this with a pinch of salt as Haldea's fortunes are linked to the primary market. However, even Ravi Kapoor, head of equity capital markets at DSP Merrill Lynch, talks of a figure of $2 billion (a shade less than Rs 10,000 crore) that could be raised in the next 6-12 months. That would be nothing less than breathtaking when compared to the six IPOs each in 2001-02 and 2002-03, which raised Rs 1,082 crore and Rs 1,039 crore respectively. In fact, the total amount mobilised through public issues in the last seven years—Rs 13,882 crore—would seem paltry.

Kapoor's confidence partly stems from the most recent fund managers' survey conducted by Merrill Lynch in which 88 per cent expect an over 15 per cent growth in earnings per share of equities in the next 12 months.A majority expects double-digit returns from the Sensex which is expected to rule between 3,800 and 4,500 points in the next 12 months.

But what's all this secondary market talk doing in a primary market story? Well, there's a definite link between the two. Investors won't flock to an issue unless the post-listing price promises healthy returns and the trading volumes ample liquidity. Then there's the buoyancy in sentiment that comes with a rise in key indices. "A healthy secondary market will ensure a flow of IPOs," says HSBC Securities vice-chairperson and MD Naina Lal Kidwai, attributing part of the Maruti IPO success to a rising Sensex in the run-up to the issue. "IPOs always move with a lag. The secondary market moves first," says Kapoor.

However, none of all that has been said so far presents an irrefutable argument that the primary market is indeed on the threshold of a revival. A lot depends on what will follow the Maruti IPO, and how soon. The main doubting Thomas, strangely, is the man who would stand to benefit the most from a revival. "It's too early to say the primary market, comatose for years, could be coming back to life. What's happening is probably just a twitch of the eyebrows," says Haldea.

Since psus account for most of the forthcoming IPOs, there could be delays or a complete derailment of the process due to political compulsions of the ruling coalition. The timing of the biggest float on the anvil, TCS', remains uncertain. Tata Sons chairman Ratan Tata said recently that the IPO prospectus would be ready in six weeks, but remained steadfastly non-committal on the timing. Even Deepak Sugani, Patni Computer's CFO, is unwilling to give a date: "The logical conclusion would be to do an IPO at some point. But there is no call on its timing."

Despite an all-round interest, there is no conclusive evidence that the retail investor is flocking to IPO counters, with due regard to the 3 lakh retail applications that the Maruti IPO received. Just a comparison: the number of applications for IPO splashes by Reliance Petroleum, Mangalore Refinery and Jindal Vijaynagar—to name just three among the thousands that hit the market in the heyday of IPOs during the first half of the 1990s—ran into millions.

But then today, it's a different market populated with mutual funds, which cater to retail demand and sound institutional investors. Moreover, today early-stage financing for projects is available through venture capital or private equity and promoters don't need to flock to the markets. "Hopefully, those days are over. Small retail guys wanting to play it should come through mutual funds," urges Kidwai. Adds Bharti's Gupta: "Many of the IPOs (in the 1990s) were small ones floated by bad companies with bad projects. The total amount raised and the quality of the issues is more important." And that's what seems to be happening now.

So, what level of IPO activity will be good enough to merit the magic R word? "A couple of significant deals a month," says Kidwai. Gupta will be happy with one decent issue of Rs 100-200 crore every month accompanied by some small ones. It seems the country can live with not having won the World Cup; losing in the finals to the world's best team will do.