IPO LISTING - PRICING IS THE BANDHAN OR SENTIMENTS?

By Ruma Dubey

Things are a bit strange in the primary or IPO market.

Bandhan Bank got listed on 26^th March, making a fantastic debut. As against the IPO price of Rs.385, it opened Rs.110 higher at Rs.485, up over 29% of the IPO price. Even today, it remains much over the issue price at Rs.462 levels. The issue had got a great response, getting subscribed 14.63 times.

And then take the case of Hindustan Aeronautics Ltd (HAL). The IPO of PSU Hindustan Aeronautics had a very poor response; it was LIC which bailed out the IPO by subscribing to 70% of the issue size. The IPO had aimed to raise Rs.4200 crore and it managed to garner Rs.4088 crore. The QIB portion, thanks to LIC was 1.73 times while NII portion was subscribed just 3% and retail investors was better at 39%.

Thus in the background, no one has really expected a spectacular debut from HAL on the bourses today. The stock got listed on the BSE at Rs.1169, a discount of almost 4% over IPO price of Rs.1215. It has since then got further pounded and is now at Rs.1140 levels.

So what really happened here? One IPO got a fantastic response and even more spectacular listing while the other got beatan. Both are very strong companies, fundamentally strong yet one found takers and the other did not.

All are blaming it on the pricing and pricing alone. But is that really so? Take Bandhan Bank. As stated in our New Issue Analysis, based purely on logical reasoning, at Rs.375 per share, Bandhan’s market cap was at Rs.44,730 crore, which meant, it had a one year forward price-to-book value (PBV) multiple of 4.0x, which is the highest among all Indian listed banks currently. Most expensive listed bank in India (so far), based on the PBV metric of valuation, is HDFC Bank, ruling at FY19E PBV of 3.8x, enjoying premium multiples due to its large balance sheet size of Rs. 9.5 lakh crore (against Bandhan’s Rs. 33,219 crore), high CASA ratio of 45% and low net NPAs of 0.4% (Bandhan’s 0.8%). Another leading private sector lender Kotak Mahindra Bank is trading at one year forward PBV multiple of 3.6x. Both these banks did make Bandhan’s IPO pricing look very stretched.

Yet, the listing defied all this well laid out logic. Ditto in the case of HAL. At the IPO price of Rs. 1,215 per share, company’s market cap is at Rs. 40,628 crore, with enterprise value of Rs. 30,270 crore. On one year forward earnings, EV/EBITDA and PE multiples are around 5x and 14x which are extremely attractive, given the company’s unmatched strategic position and huge untapped potential in defence sector. On peer comparison, defence communication, radar and electronic warfare systems maker Bharat Electronics, is currently trading at historic EV/EBITDA multiple of around 13x and historic PE multiple of 23x, making issue pricing of Hindustan Aeronautics very attractive.

Bases on the current trend of listing, the only emerging pattern we see is that issues with very high QIBs, especially FII portion are having a better listing and vice versa. Again, when we compare this with the mother of all listings – Avenue Supermart, QIB and NII, mainly HNIs turned the tide. Then again, DMart is an exception and not the norm.

Over and above all this, what we also notice is that sentiments over rule everything else, even logic and pricing. And in case of PSUs, what we have noticed is that majority of the times, issues just about manage to get subscribed, again, most of the times, with the help of LIC.

Currently, more than anything else, it is sentiments. The apathy towards PSU stocks, the looming issue of Long Term Capital Gains tax and overall poor market sentiments are defining these IPOs.

Warren Buffett at the Hathaway AGM last year reiterated his revulsion for IPOs. When questioned about how people have struck it rich in some of the IPOs in USA, Buffett said, “You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day but there's no reason to let that affect your investing strategy at all. You have to find what makes sense and follow your own course.”

If one looks at the IPOs the way Buffett does, it makes perfect sense to stay away. These are all mostly Offer for sales. This means that the promoters and anchor investors are selling a part of their stake. They decide the price, they decide when to sell and they cash out. So how do we, the retail investor gain? Unlike in the secondary market, the price of a stock is decided by the demand and supply and in that way is fairer.

Pricing has and will always continue to remain the one big decisive factor. For the past few years, it is high pricing which killed the IPO market; it singularly eroded investor profits and thus the confidence. Every issue which comes out today has pricing which outdoes the fundamentals of the company. After the high price of the IPOs there is virtually no gain left on the table for the investors. It is more prudent to buy the stock after it has got listed as very soon, after listing, many PE funds and HNIs make an exit, bringing down the price. Yes, PE funds and bigwig investors have become mere props to lure investors to the IPO and they in turn make a quick buck.

The next week will see a flurry of listing and based on sentiments and subscription, it looks like ‘woebegone’ will be the theme.