IPOs in the red

Initial public offerings are the biggest casualties of the correction that has gripped the secondary markets since May 11. Many firms have slowed their entry into the equity market and others have hit the pause button. Is the IPO market ever going to recover or has investor confidence been dented that badly?

By Sandeep Suman

When major players like DLF, Parsvnath Developers and Bharat Hotels are waiting for improvements in the capital market under the garb of approval from the Securities and Exchange Board of India (SEBI), a small firm, Shirdi Industries Ltd, manufacturer of interior furnishing products, showed inordinate gumption by swimming in the turbulent waters with a Rs 50-crore Initial Public Offering (IPO). Not that that has calmed the biggies, who are apprehensive about full subscriptions, and are taking all precautionary steps to see that that market doesn't let them down with a thud.

It's not a fear without reason—IPOs, in general, are feeling the heat of a volatile market. While an unusually choppy Sensex hasn't entirely taken the bubbly out off the IPO market, it has certainly has put the brakes on what had turned into a rash IPO overdrive.

"Since our Rs 127-crore expansion project is currently in the implementation stage, it was high time for us to enter the capital market," says Shirdi Industries chief Rakesh Agarwal. "We know that the stock market is unstable but want to go with the wind."

But, as far as India's big firms are concerned, the market hiccups are the size of a sizeable volcanic irruption that have cast cloud over their IPOs, too. Realty major, the K P Singh-led DLF, expects to raise Rs 13,500 crore from its maiden run in the capital market to expand its empire across the country. Industry experts say that DLF might raise less moolah from the IPO than it expects to.
Sources close to the management of DLF Universal and its merchant bankers say that the company might have cut the stratospheric initial valuation it had estimated for itself, even as its IPO looks likely to be delayed beyond August. The sources say that DLF has drastically pruned the estimated value of the company from about $25 billion to 15-18 billion. The number of shares proposed to be issued—about 202 million—remains the same, although the amount sought to be raised—about $3.1 billion—might be cut to about $1.6 billion.

Ask the company about the delay of its IPO, and DLF says that it has not received clearance from the SEBI. The delay has ostensibly been caused by objections raised by some minority shareholders of DLF, who complained about unfair treatment during an earlier issue the company had floated.

Realpolitik has learnt that the real estate giant is more concerned about the valuation of its shares, and is, therefore, buying itself time any which way it can. "If the markets have dipped by 30 per cent and most valuations have also dropped, then it is reasonable to assume that DLF would not be immune," says a merchant banker.

However, DLF Universal vice-chairperson Rajiv Singh has his own version of things. "We had never said that we are looking at mobilising $2.5 billion from the market," he says. "We never had plans to go for a pre-IPO roadshow. We are just awaiting the SEBI's nod for the IPO. Since the markets are stabilising, our IPO plans are moving as per schedule."

There is market speculation that adverse conditions could postpone the DLF issue beyond August, perhaps to a month later. (It was expected to hit the market in early July.) Now, if DLF is in this IPO bind, it goes without saying that others such as GMR Infrastructure, Parsvnath Developers, and Bharat Hotels are also in the same state. In fact, the DLF issue will serve as a test case for many upcoming issues. DLF (Rs 13,500 crore), Parsvnath (Rs 1,600 crore) and Bharat Hotels (Rs 600 crore) are expected to raise a whopping Rs 15,700 crore from the market.

The DLF Group is now venturing into Special Economic Zones (SEZs), hotels and Infrastructure from the existing vertical homes, offices, shopping malls and entertainment complexes towards what it calls "Building a New India". The realty major has discovered "enough space" in the Indian office segment, which remains largely untapped. Of the targeted Rs 13,500 crore, the Delhi-based construction firm is expected to spend Rs 6,500 crore buying land in and around 62 cities, including in metropolises.

DLF is placing its bets on the office space segment and aspires to develop 110 million sq ft in the coming 10 years. "In the next three years, DLF will develop 39 million sq ft of office space, all of which is already locked-in," a company official says.

Furthermore, DLF Universal Ltd, which covers most cities in the north, is now looking south for its growth. Pointing out that the company has invested in Bangalore, Chennai and Hyderabad for IT parks and retail space, Singh says that the company has plans for Kochi, and that it will quickly ramp up operations in Tier 2 cities in the south.

Besides, the realty giant is also looking to strike Vadodara's largest land deal, worth about Rs 90 crore, for a 600,000 sq ft piece of prime land off Race Course Road. According to sources, DLF has already signed an initial agreement with the Sarabhai Group top acquire the 600,00 sq ft space, carved out of the sprawling 28 lakh sq ft campus housing the Ambalal Sarabhai Enterprises' manufacturing facilities in Wadiwadi.

Similarly, Parsvnath Developers is targeting Tier 2 cities in line with its integrated township plans and resorts. Besides, its chairperson, Pradeep Jain, says that the company has charted out expansion plan in South India and bought nearly 70 acres in Yellahanka on the outskirts of Bangalore, more than 150 acres near Kochi, and 75 acres in Mysore, to build townships, IT parks, shopping malls and resorts. Parsvnath, which has a land bank of around 2,500 acres and has completed 25 projects so far, recently landed a 126-acre land deal in Chandigarh for Rs 821 crore, outbidding DLF Universal.

Semi-paralysed by the unpredictability of the equity markets, Bharat Hotels has been very slow in its expansion plans. Lalit Suri, chairperson and managing director, says that his company would require an investment of Rs 1,100 crore to expand its five-star luxury brand, The Grand, to Hyderabad, Amritsar, Jaipur, Chandigarh and Noida. Suri hoped to raise Rs 600 crore from an IPO and the remaining Rs 500 crore from a 1:1 debt equity ratio.

Merchant bankers and public relation firms associated with these groups admit that they are going slow on their issues following the recent volatility in the equity markets, but add that since the market is settling, they might all approach the share bazaar in a couple of months."The positive aspect is that there has been no announcement on IPO plan deferrals," they say, adding that good companies could make it at reasonable prices alone.

But the trends are hardly encouraging companies to test the swirling waters at Dalal Street. Notably, two companies—Vigneshwara Exports Ltd and Bluplast Industries Ltd—have decided to pull their IPOs, following a stock market slide that soured demand, and return the money to investors. After the stock performance—or absence of it—of Deccan Aviation and Unity Infraprojects, many investors had, in fact, panicked and pulled out.

The substantial losses suffered by investors in new listings could delay many IPOs and force companies to lower their valuations a la DLF Universal. Many firms, including Gammon Infrastructure, Ansal and Omaxe, have already hit the pause button. Caution is the overriding market sentiment in the market and valuation will be the big issue. Even the Vijay Mallya-led Kingfisher Airlines has decided to not approach the market till it discovers "optimum value" for its shares.

In fact, Reliance Petroleum finally traded below issuance price, while Deccan Aviation listed at 34 per cent discount to issue price. Both suggest the going could be tough for the larger issues in the India pipeline.

The Sensex has unsteadily hovered around 10,500 since it crashed from its high of 12,671 in May. According to the Prime Database, which tracks the bourses, Rs 140,000 crore worth of primary issues are planned this fiscal. Investment bankers hoped that IPOs would raise Rs 45,000 crore in 2006-07 alone, while real estate and construction and infrastructure companies are poised to raise more than Rs 20,000 crore from the capital market over the next few months.

"These estimates are difficult to realise in the current scenario, as the overall sentiment is not good and investors are also wary of a volatile market," says Prime Database managing director Prithvi Haldia, adding that IPO financing makes sense only if there are huge subscriptions. "But, for sure, the market meltdown will affect upcoming issues, which are likely to be priced more conservatively."

He admits that investors are wary of a volatile market and that the current pipeline of IPOs can be categorised in three categories: the anxiety levels would be higher in the first two, where either the issue dates have been announced or where the firms have already filed the prospectus with the SEBI.

There are four firms whose issue dates have been announced. In addition, there are between eight to 10 firms whose prospectuses have been approved by the SEBI, although dates have not yet been announced.

There is another group of 48 firms whose prospectuses have been filed but are yet to be cleared. The third set comprises about 350 companies, which are yet to file their plans and will be looking for market to stabilise.

ICICI Securities vice-president Ravi Sardana observes that only those firms which have strong fundamentals and have urgent fund requirements will go ahead with their IPO plans. Merchant bankers say that those IPOs that are still on the drawing boards could get delayed. These firms might wait for the sentiments to turn positive on the stock market before taking a final call on their public issues.

The Bombay Stock Exchange (BSE) Sensitive Index has slumped 29 per cent since May 11, thanks to overseas institutional investors selling off a net $2.3 billion of Indian stocks. This money might not hurry back.

Nonetheless, there is a silver lining: now that India has been pushed off the gravy train, Prime Minister Manmohan Singh will have a strong incentive to focus on steps needed to improve the country's business climate and competitive position. In the two years that it has been in power, the United Progressive Alliance government has done little for the economy, which drew a large part of its strength from a 27-month-long acceleration in bank credit—according to Morgan Stanley, the longest such spell in India since the early 1970s. This exceptional credit growth was fuelled by the $20 billion of overseas money that went into the Indian stock markets from June 2004 to April 2006.

"Many of the recently listed IPOs are quoting below their offer price," says an observer. "In such a bad market, we cannot tell clients to wait for the long term as their sentiment seems to have badly bruised by the recent carnage."