Devyani the sole IPO to hold up

In the previous week, the sole IPO to hold up well and truly above the issue price was Devyani International. The Pizza Hut and KFC franchisee is trading a good 31% above the issue price. The IPO price was discovered at Rs.90 and while the listing was strong, it did not build on its gains after that. However, in a difficult week, Devyani International was the only stock to hold solid returns after listing. The other four stocks listed during the week present a sad story. 

Discount to the IPO price

Just a week back, it was axiomatic that any IPO would list at a premium and sustain gains. This week was a return to reality. Consider these cases. Windlas Biotech listed at a discount and trades at a huge 20.7% discount to IPO price. The other stock was the much-hyped CarTrade Tech. Against the issue price of Rs.1,618, the stock closed Day-1 of listing at a discount of 7.85%. Krsnaa Diagnostics did list marginally above the IPO price but currently trades at 4.35% discount to the IPO price. Exxaro Tiles was relatively neutral trading at just 2.9% above the IPO price. In short, 4 out of the 5 listed IPOs disappointed. 

Was it about valuations?

It would be naïve to believe that issuers would underprice their IPOs in the midst of a booming IPO market. The problem is that Indian IPO markets move from reasonable valuations to stretched value very quickly. The entire story of IPOs is about leaving returns on the table for investors. Consider these instances. Chemplast Sanmar had steeply priced its IPO despite having negative net worth. Nuvoco vistas values cement business at par with Shree Cements. People are OK to accept loss making companies like Zomato or Devyani, where there is a credible business model in place. That cannot be applied to all businesses. 

Reasoning for raising funds

One thing that stands out is the need for funds. It is not a great idea to raise funds just because it is easily available. Investors are most impressed when the IPO raises fresh funds for expansion or for diversification. But the recent IPOs are a different story altogether. Most of the IPOs have a strong OFS component where promoters or early investors are using rich valuations to exit. Most of the smaller companies are raising funds in the IPO for working capital or generic office expenses. The maximum fund raising is happening to reduce debt. Does it mean that cost of equity is lower than cost of debt? That is the dichotomy that the IPO listings are trying to point out. It is a harsh but an early lesson!