Gold Rush On D-Street

One of the best ways to counter temptation is to yield to it. For the average bargain hunter looking for the best floats in the primary market, temptations these days are a dime a dozen. These come in the shape of a thick IPO (initial public offer) pipeline which, at this very moment, houses a raft of issues. The market resembles a wild scramble featuring offers ranging from biotech and healthcare to food delivery and financial services companies.

The robust IPO dashboard implies a marked demand for new issuances from a corporate sector which, despite the pandemic, is looking to raise fresh capital from investors. The latter have eagerly heeded the call, a trend that is reflected quite adequately in the mobilisation figures.

Indeed, a number of primary offers have lately garnered large-scale support. For reasons that will be perfectly understood, the obvious enthusiasm is partially on account of those who have sought quick and early exits for what is often euphemistically called ‘listing gains’.

Many of the ordinary investors who seek quality IPOs are, as always, driven by their desire to cherry pick potential gainers from among a wide basket of candidates. A section of them clearly root for the most popular players. One of the latter may well be Zomato, currently billed as one of the strongest names in the contemporary economic landscape. Ditto for Paytm, which is said to have lined up a mega IPO later this year.

An initial offer, as everybody will agree, may serve an aspiring corporate in two definite ways. One, a company can mobilise capital by going public and letting investors (those who are successful in securing allotments) own its stock. Two, it provides (after listing, which of course follows soon after) an exit for those who already hold shares. These days, exit-seekers are often institutions or other preferred holders who have previously taken strategic positions by investing in the company concerned. A stock that gets listed on the exchanges and trades actively on the secondary market (where efficient price discovery takes place) stands a chance to create value for all sorts of stakeholders, including first-time allottees.

Signals for investors

That said, there are a number of signs that IPO chasers should watch out for, the first of these being “management quality” — arguably, an arcane matter at any point of time. I am deliberately skirting it and concentrating instead on less abstruse issues. To begin with, I wish to start with a simple point: the reasons why the IPO is being made in the first place. In other words, an investor needs to find out as much as he can about the ways in which capital will be deployed.

A good reading of the relevant sections of the offer document is naturally in order. That is easier said than done, considering the sheer bulk of reading material that you will have to waddle through. The recently-filed Go Airlines offer document, consisting of more than 400 pages, is a case in point. I allude specifically to the formidable portion titled “Objects of the Issue”, which in this case includes “prepayment of outstanding borrowings”.

Such companies, in other words, are expected to retire old (and possibly high-cost) debt with the proceeds of the public float. Objects, of course, may also include specifics that are not applicable to other candidates. In the Go Airlines case, for instance, the company intends to use a portion of the proceeds to ensure repayment of dues to Indian Oil Corporation for fuel supplied to it.

It may also interest you to learn that companies, not infrequently, hope to secure intangible benefits from listing of their equity shares as well. Enhancing their visibility in the market and augmenting brand image among customers is a fairly common objective as well.

From that airy domain, let me shift my gaze towards common numerical tangibles — mundane but necessary details like PE and PB, which stand for Price to Earnings and Price to Book Value. I will consciously not impart a lesson in accounting, but it will be sufficient to state that these ratios essentially underscore how expensive the issue price is for the shareholders.

Whether investors should refuse to seek allotment merely on the basis of unfavourable ratios is not for me to suggest. That is because several other non-numerical issues often wriggle their way to the forefront. An investor, for example, may simply choose to earmark a portion of his surplus because the IPO candidate happens to be a storied name.

To wit, how will an ordinary investor react if he reads in the papers about dairy giant Amul aiming to list its equity? Chances are, he will try to grab it without specifically considering its financial numbers. A certain kind of euphoria-driven perception is quite likely to kick in there, right?

Yes, such an emotion will be evident in the case of legendary brands (Cadbury), absolute monopolies (Indian Railways) or boutique names (Doon School, in an age where you have several educational institutions selling equity). Mind you, for once I am being flippant here — evidently, I have let my imagination run riot.

Initial offer investors will also look at listed peers if such entities are indeed in existence in the secondary market. A company operating in an older economic segment (commodity, for instance) will probably have several listed competitors already. However, this may not apply to the new economy, particularly to segments that are lately opening up. Food delivery specialist Zomato will be the first of its kind in India.

On a more sombre note, I have also tried to crystal-gaze a bit. The idea is to foresee the IPO landscape of tomorrow. Which sort of companies are likely to add vigour and verve to the primary market in the days to come? Here are three thoughts for your consideration.

• New-generation businesses driven by digitisation: Personal technology, mobility, transportation, logistics, social commerce, communications and media
• Finance and banking: Especially smart players in areas like payments, transactions, credit assessment, loans and the like, perhaps all of them empowered by artificial intelligence
• Healthcare: Diagnostics, testing, medical procurements and may be even certain aspects of treatments

Yes, some of this will follow the example of, and draw inspiration from, the advanced markets in the West. Ergo, the emerging landscape in India is very likely to see life insurance, small lenders and asset management companies list their equity. A whole new lot of electronic vehicle manufacturers, armed with benign policies pursued by the government, may amble in. The same applies for players who will operate in the alternate energy space.

Already, some of these areas — green energy, for instance, which is known to reduce carbon content — seem to have drawn many ethical investors. Dedicated ESG funds, for their part, are expected to turn into a significant force. There are signals that advanced markets are lapping up climate-friendly businesses. A similar trend will emerge in India too. It is just a matter of time.

On a completely different plane, I expect more efficient regulatory norms for IPO investors. May be the authorities will frame friendlier policies to ensure that the investment process gets easier. Already, over the past few years, the system has evolved considerably. Investment, allotment and listing are a lot more convenient today — the policy framework governing these critical aspects should only get stronger with the passage of time.

Listing Gains. Or Not

Like a verdant oasis in an arid desert — which may well turn into a mirage — listing gains are for many a constant thrill. Not every time do they materialise though, as folks have found out on many occasions in the past. The temptation to sell on the first day — or at the earliest once allotment is secured — makes it a chancy affair. Indeed, one would venture out to suggest that listing gains should really be disincentivised by the authorities.

Buying and holding high-quality, high-conviction IPOs is a far more sensible goal. An investor who waits for efficient price discovery stands a better chance of being rewarded by the market. There are examples galore, I do not wish to spell out specific names to score a point on this front.

Many years ago, a senior stock broker (battle-hardened warhorse, I used to call him fondly) told me what he then thought of Bharti Airtel. Mobile technology in those days was as fragile as a fragrant spring flower. “Isme paisa hoga nahi”, were the words that still ring inside my cranial cavity. I will not name him out of deference, but that one stock has helped a lot of people make small fortunes. The current price of the Bharti Airtel stock? A neat Rs 540.

The primary market can make us emirs. It can also make us fakirs. I rest my case.

The author is Director, Wishlist Capital