IPOs in 2000 -- High-risk, glitzy and media-centred

S. Vaidya Nathan

THE year 2000 was not good for the secondary market with the broad market declining around 25 percentage points. But, unlike the preceding three years, the primary market was bullish. There were close to 150 initial public offerings (IPOs) -- a far cry from 1998 and 1999, when equity offerings were few and of doubtful quality.

But the increase in the number of IPOs is about the only positive aspect of the primary market activity in 2000. Quality was poor, as in the preceding years. But, unlike the preceding three years, when there were a few good rights offers, the rights offer market was a washout in terms of quality and returns to investors.

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Private placement dominates

Apart from IPOs, the other active segment was private placements. Preferential allotment of shares to promoters and/or institutional investors dominated 2000. The offers were largely from companies in the technology, media and telecom (TMT) triad. And most of them came in the first half of the year. This was not a surprise given the major bull run in stock prices -- especially in the TMT triad.

The preferential offers provided institutional investors with good value based on market prices in the first half. Selective disclosure of material information also formed part of the exercise, and ensured that the preferential offers delivered value to investors. But only those institutional investors which cut exposures from such offerings would have profited. That appears to have been the case going by the exaggerated decline in many technology stocks of companies that took the private placement route to raising equity.

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Institutional investors which held on to many exposures taken through the preferential offer route saw value erosion in most cases. Perhaps the most glaring such example was that of the Zee Telefilms equity picked up by Goldman Sachs at Rs 1,000 per share. The conversion took place after the share hit a steep down-curve, and the investor was stuck with shares at Rs 1,000. The Zee stock is today only about 27 per cent of that value. In many ways, this example was in keeping with the trends in the IPO market.

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A media affair

If one ignores the myriad companies (see accompanying story) that came out with IPOs to bankroll their foray into and/or existing small businesses in information technology, the IPO market of 2000 was media-dominated. Ironically, this was in a year when the long-favoured media stock, Zee Telefilms, almost dropped out of investors' radar, with a steep 80 per cent decline in its stock price from the highs of the first quarter of 2000.

To some extent, the fancy for Zee in the first quarter, the almost 11-fold jump in the listing price of Television Eighteen (TV-18), and the general fervour for the convergence theme in India as well as at the global level, led to many media companies coming out with IPOs.

A look at the Table shows that some of these IPOs did deliver reasonable returns so far. Balaji Telefilms has done well and appreciated handsomely -- more than doubling.

Two other media IPOs that have held out (despite the recent downtrend triggered by the arrest of a film financier) are Mukta Arts and Padmalaya Telefilms. But those that made it with their IPOs form only one part of the story. The other part was the number of unlisted media companies that were touted as potential IPO candidates but eventually did not make it. The sharp fall in the TMT stocks since March 2000 meant that many plans had to be put on the backburner.

Creative Eye was one such case that almost fell through. It had mounted a full-fledged campaign for a book-building offer at Rs 225 per share (face value: Rs 10). But the offer did not get as a good a response as expected; there were indications that it just scraped through.

The company cancelled the offer and, later in the year, cutting its price by almost 55 per cent, came out with an offer at Rs 50 per share (face value of each share was reduced to Rs 50). This was just as well as the stock has barely managed to hold the price-line around the offer price. Creative Eye (whose revenues and earnings now hinge almost entirely on one programme -- Om Namah Shivaya, on Doordarshan) went ahead, while many others pulled back.

High-risk show

That this is a high-risk sector for investors was highlighted by the steep downward rating of media stocks. These stocks, which once commanded valuation levels comparable with IT stocks though without the potential to deliver similar consistent growth, are now valued more realistically. The same, however, cannot be said for the once highly-favoured Zee Telefilms.

Concerns over revenue and earnings quality (Zee Telefilms' efforts to project high earnings through intra-group transaction triggered the fall), volatile revenue streams that depend on the success or otherwise of select video and/or audio rights, management concerns, the role of behind-the-scenes financiers and their backers, and issues of transparency peg the risk levels in this sector high.

As for the Indian market, media is now the favoured terrain. It is quite likely that institutional investors will go through a learning curve. Already, many funds have pared exposure levels in this sector. This could also lead to dampened valuation levels and a high degree of volatility. Only as the universe expands and companies with a diverse range of businesses come to the fore will the learning curve be complete. What happened to TV-18 in the last month -- the stock fell more than 50 per cent -- is instructive.

Only the enlargement of the universe of companies will lead to a firmer framework for stock valuation in this sector. Till such time, investors may be better off avoiding direct exposures and going through the mutual fund route (though they have also pared exposures). A few stocks, such as Balaji Telefilms (on account of its top-rated programmes) and Adlabs Films (due to its stable revenue and earnings profile) may, however, be looked at closely for investment.