A lukewarm response to recent initial public offerings suggests the boom days of 2010 are long gone. So, what will help bring life back into this market?
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Primary equity issuance volumes in India have sunken to new lows amid depressed equity markets and a fall in confidence following the dismal secondary performances of recent issues. All hopes are now pinned on forthcoming government divestments, the success of which could reverse sentiment and unlock a bulging pipeline.
Indian ECM issuance volumes have plunged so far in 2011 amid volatile secondary markets and a crisis of confidence due to domestic politics and a spate of corruption scandals. IPOs, follow-on offerings and qualified institutional placements, which were a feature of the market in 2010, had been few and far between year to date as key indices lost ground and political turmoil seemed to distract the government.
The benchmark BSE Sensex has lost 21% so far in 2011. Thomson Reuters data shows that there were 57 equity and equity-related deals worth US$7.9bn in January-August this year, or almost half the US$14.5bn raised through 92 deals in the same period last year.
“It is difficult to push through deals at the moment even though we have many companies sitting in the pipeline waiting to do deals,” said a banker. “Some small IPOs are still getting done, but no one really has the confidence to launch a decent-sized listing in these markets.”
“The problem is that a number of decent-sized IPOs got done this year and most of these, at the time of bookbuilding, were seen as appropriately valued, but, post-listing, their trading performances have been miserable, pushing investment interest into a corner,” said another banker.
For example, the Rs46.6bn follow-on offering from Power Finance Corp was 4.34 times subscribed when books closed on May 12. Retail books were two times covered and the QIB portion was 6.92 times covered. However, the stock then performed poorly. The shares were placed at Rs203, but were trading around Rs136–Rs148 last week.
L&T Finance surprised the market with its Rs11.45bn IPO in July, but, despite a higher-than-expected 50bp interest rate hike in the middle of bookbuilding, managed to generate a healthy oversubscription. The stock priced at Rs52, but fell on debut and closed at Rs47.55 on August 25.
The only chance of a revival is expected from the Indian Government’s ambitious divestment programme, which has failed to take off, despite some early success.
State-run Steel Authority of India, which postponed its follow-on offering of up to Rs70bn (US$1.56bn) in June, is said to be looking at re-launching soon. Oil & Natural Gas Corp is also in line to launch its follow-on of up to Rs130bn, through which the government will sell a 5% stake. Also expected is a Rs190bn follow-on offering from Indian Oil Corp in the second half of the fiscal year.
“The success of these privatisations is important, not just during bookbuilding, but also the post-share placement. So, the deals have to be priced at a significant discount to current trading prices if sentiment in Indian equities is to come back to where it was,” said a fund manager.
There are other smaller divestments in the pipeline. The government has also approved the divestment of shares worth around Rs40bn in Hindustan Copper, with Bank of America Merrill Lynch, Enam, ICICI Securities, Kotak, SBI Capital and UBS as leads, while offerings for Rashtriya Ispat Nigam, which manufactures steel products, and National Thermal Power Corp are being discussed.
Including this year’s target, the Indian Government aims to raise Rs950bn from the sale of shares in state-run companies over the next three years. Last year, it failed to meet its target of Rs400bn, falling short with just Rs224bn after several planned deals were delayed due to the weak market.
Apart from domestic listings, stable market conditions may well prompt the launch of a few offshore listings, which figure prominently in the pipeline.
India’s Fortis Group has plans for two listings worth a combined US$1.5bn. Citigroup, Nomura, RBS, Religare Capital Markets and Standard Chartered have been mandated for a business trust listing of up to US$500m in Singapore for Fortis Healthcare’s assets in India.
Also coming up from the Fortis Group of companies is the up-to-US$1bn listing in Singapore of Fortis GlobalHealthcare, which has currently been mandated to DBS and Religare Capital Markets. Fortis Global’s international assets include Quality Healthcare in Hong Kong, a stake in Dental Corp in Australia and a 28.6% interest in Lanka Hospitals in Sri Lanka.
By Shankar Ramakrishnan, IFR Asia Deputy Editor