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Aarati Krishnan

INVESTING in the Initial Public Offering (IPO) of a new company was an instant money-spinner in 2004. At the time, investors were gung-ho about Indian stocks, every IPO was sure to attract investments for several times the offer size, and debutants made astronomical gains on listing. But the recent crop of IPOs has disturbed this predictable pattern.

Retail investors may now need to overhaul their investment strategy for new offerings. With the magnitude of response to the IPOs shrinking, investing in one so that you can "flip" the stock on listing is no longer a foolproof strategy. So what do the recent trends presage? And how should you rejig your investment strategy for IPOs?

We analysed the response and the post-listing performance of all the book-built IPOs by new companies over the past year. This revealed the following trends:

Waning response: Investor response to new offerings is cooling off from red-hot to lukewarm. A majority (10 out of 13) of the book-built offers of 2004 attracted subscriptions for well over 10 times the offer size. Particularly fancied ones, such as Indoco Remedies and Bharti Shipyard, attracted bids for 60 and 72 times the offer size!

Compared to this, the tally for 2005 is unimpressive. Only five of the 10 new companies that launched IPOs in 2005 attracted even double-digit subscription numbers; with a majority of the recent ones drawing bids for 5-7 times the offer size. However, reasonably priced offers with good credentials defied this trend. Gokaldas Exports and Gateway Distriparks attracted subscriptions of 46 and 28 times respectively in their book-built offers.

An over-subscription of 5-7 times indicates that while investors are not yet giving IPOs the short shrift, their appetite is certainly waning. This is especially because subscription numbers for the retail and high-net-worth category are usually inflated. Investors typically put in bids for several times their actual requirement to improve the chances of securing allotment.

Aggressive bidding continues: Though the extent of over-subscription to IPOs is on the wane, the majority of individual investors who participate in the offers appear to bid quite aggressively.

The lion's share of the bids is made either at the cut-off price or at upper end of the price band. This indicates that a good number of investors are either unsure how to bid or bid aggressively so that they are certain of securing allotment.

Eight of the 10 book-built offers made in 2005 received 90 per cent of the bids at the upper end of the price band or the cut-off price. Nor has the asking price for an IPO influenced bidding patterns. The Shoppers' Stop IPO, which valued the stock at about 40 times its earnings at the upper end of the price band, attracted 92 per cent of the bids at this price.

During the course of a book-built offer, responses from institutional investors usually come in early; they are also more likely to bid at in-between points in the price band.

Bids from individuals (both retail and high net-worth) usually seem to come in at the last minute, the majority being at the cutoff price or at the higher end of the price band. However, in some of the recent offers, such as Shoppers' Stop, India Infoline and Allsec Technologies, the company has taken the cue from institutional bids, to fix the offer price at a mid-way point or at the lower end of the price band.

Inconsistent listing gains: Given an ambitious asking price and reduced demand from investors for the new shares, not many of the recently listed stocks soared on their debut. The recent crop of offers has an inconsistent record of delivering gains on listing. Four of the six book-built IPOs since March closed below the offer price on the day of listing. Allsec Technologies, Shringar Cinema, 3I Infotech and Jaiprakash Hydro Power listed below the offer price, while India Infoline listed barely above. Only Gokaldas Exports and Gateway Distriparks generated high listing gains reminiscent of 2004; this can probably be attributed to their moderate pricing.

Changing investor profile

However, there could be healthy aspects to the recent trends in book-built IPOs. In a trend that began with the Jet Airways offer and has become well-established since April, institutional investors such as mutual funds, FIIs and venture capital funds have replaced non-institutional investors (read high net-worth investors), as the largest category of bidders in recent offers.

In some of the recent IPOs, institutions accounted for a dominant proportion of the bids. About 70 per cent of the bids for the India Infoline offer, 85 per cent of the bids for Allsec Technologies and 48 per cent of the bids for the Shoppers' Stop IPO came from institutions. This trend is likely to gain strength, after the recent changes in SEBI regulations relating to book-built offers.

Since May, companies have been required to trim the proportion of the offer set aside for non-institutional bidders from 25 to 15 per cent; and peg up the reservation for retail investors from 25 per cent to 35 per cent in book-built offers.

Blessing in disguise

The changing profile of investors in IPOs is a healthy trend, both for the companies who tap the capital market and for investors seeking to invest through IPOs. For one, institutional investors may be in a better position to take advantage of the book-building process to help in fair price discovery during the offer. This is because institutions may find it less difficult than individual investors to assess the prospects for companies that hail from a diverse range of offbeat businesses, which have been tapping the market in recent times.

Second, as institutional investors are less likely to invest with an eye on short-term listing gains, sizeable institutional holdings in a stock may lead to more stable trends in stock prices after listing. This has been borne out by some of the recently listed stocks such as India Infoline and Shringar Cinema, which have made significant gains post-listing.

The absence of phenomenal gains on the day of listing could also turn out to be a blessing in disguise. After the recent experience, fewer investors are likely to bid for an IPO with the intention of making a quick gain on listing. This could create more space in book-built offers for serious bidders, who plan to stay with the company for the long term.

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