Investors rediscover market after CIL IPO

It was the largest ever public issue of shares by any Indian company that also experienced a spectacular success. The state-owned Coal India Ltd (CIL) intended to raise Rs 15,450 crore by selling shares but it received applications for Rs 2,40,000 crore worth of shares, 15 times of what it had asked for. 

With the success of Coal India IPO – to be listed on November 4 – the buzz in the market now is that investors have begun an exercise that can be described as ‘discovery of India’ assets. Rest assured, there will be a lot of action in the primary or IPO market in the next 6-12 months.

Why not? After all, the response to Coal India IPO from all classes of investors have had surpassed the most optimistic predictions and caught even the biggest optimists by surprise.

So much so, it could even dent the country’s bullion market impacting gold prices as FIIs (foreign institutional investors) and several other investors who were waiting for a right opportunity to put their money on some guaranteed assets chose CIL shares. They even withdrew money from bullion market to invest in CIL issue.

Even the mandarins at New Delhi’s north block who thought that the disinvestment target of Rs 40,000 crore for the current fiscal seemed a bit challenging are now hopeful of reaching a revised target of Rs 58,000 crore.  

In the changed scenario, both from the investors’ perspective as well as government’s disinvestment programme, there is a good chance of 7 more PSUs coming out with public issues (IPO or follow on issue) during this financial year. Manganese Ore, Power Grid Corp, Hindustan Copper, ONGC, SAIL, Shipping Corporation and Indian Oil are the PSU companies in the queue.

To cut deficits

Another positive fallout of the CIl issue is that the higher collections from disinvestment may allow the government at the centre to make downward revision to its fiscal deficit. In this context, SMC Global Securities strategist & Research Head Jagannadham Thunuguntla says, “There is a very good chance that the government may be able to achieve the fiscal deficit lower than even 5.5 per cent.” Of course, Rs 1,06,000 crore it pocketed earlier from sale of spectrum for 3G and broadband wireless access has also helped immensely.  

India, however, is maintaining a balance between the healthy economic growth and controlled deficit. If the government could able to achieve that fiscal deficit levels lower than 5.5 per cent that can help in elevating the stature of the Indian Government’s balance sheet in the eyes of the global investors, he said.

Right pricing of shares issued was an important reason for the success of CIL issue. Analysts in Dalal Street maintain that there is some amount left on the table in CIL IPO as most of them estimate the CIL fair value between Rs 294 to Rs 316 per share against the final price (decided at the higher range of Rs 245 per share). 

This kind of fair pricing (by CIL) bodes well for the market in terms of luring those investors who have been shying away from the market for so long as majority of IPOs in the recent times listed below the issue price and some now also quoted below the issue price.

Flush with funds

Market experts believe that the funds deployed in the oversubscribed portion of CIL issue will stay in the market and they would, perhaps, be redeployed in the secondary market or the forthcoming issues – both private and PSUs – albeit selectively. 

Jaypee Capita Services’ Abbas Merchant says that a sizeable chunk of money deployed in the Coal India IPO “was leveraged and as such will more or less come back into the secondary market….and with an impressive line up of PSU offerings coupled with unabated FII inflows, the markets should remain buoyant enough.”

With so much lessons being imparted to investors by the country’s premier bourses of late, the retail investor is now getting proficient especially to the mathematics of IPO allotments.  Angel Broking’s Siddharth Bhamre says: “People know now that they will be allotted only one-fourth or one-fifth of the quantity of shares that they have applied for. It is also not necessary that the balance would be fully put back into equity.”

The government is selling stakes in some 60 firms over the next few years and the success of Coal India IPO has added pressure on the government to price future deals attractively. Though government has deferred implementing the decision of the new 25 per cent public shareholding of listed companies, after the success of Coal India IPO, they may not have any qualms to implement it in the near future, if not immediately.

  As per the Crisil Equity Research estimate, there are at least 179 companies listed on the stock exchanges where the float is less than 25 per cent.  At current prices, these firms may have to raise Rs 1.6 lakh crore if promoters sell their holdings and if they do so through sale of new shares, they may raise Rs 2.1 lakh crore, says Crisil’s estimate.

So IPO space is set for lot of action in the coming days but at the same time retail investors (newer ones) will have to be lot more cautious before they choose to invest on an IPO or FPO. The Department of Disinvestment also plans to pitch for a higher quota for retail investors in forthcoming share sales, if not as a policy decision for both private and public sectors, apparently it wants to cash in on the buzz generated by Coal India IPO to take equity culture to Indian households further.

Currently, the Sebi norms stipulate that minimum 35 per cent of the shares offered in a book-built share sale – where investors are to bid in a pre-decided price band – must be reserved for retail investors. Another positive to retail investors is the market regulator Sebi had recently hiked investment cap for retail investors to Rs 2 lakh from the earlier limit of Rs 1 lakh. 

Strategies for retail investors

Here are some tips for retail investors in the bullish IPO market. Apply with ABSA (applications supported by blocked amount) facility that blocks the bid amount  in your bank account till the allotment. For instance, you apply for shares worth Rs 2 lakh; this amount gets blocked in your account. And on allotment say, for instance, shares worth Rs 60,000, only that much amount will be credited to the demat account of the investor and the balance Rs 1,40,000, is unblocked by the bank.

Book building process helps discover the price of an IPO, where the company sets a floor price (the lowest price) and a ceiling price (higher end of the price band or cap).  The actual price is determined by company promoters and their investment bankers after ascertaining how many bids came at what price. The basis of allotment in the case of book-built issue is finalised by lead managers or investment bankers within 2-weeks from the date of closure.

Where a company is divesting more than 25 per cent under a proportionate allotment system, three classes of investors can bid for the shares.  They are Qualified Institutional Buyers (QIBs) including mutual funds and FIIs, High Networth Individuals (HNIs) and Retail investors with an allotment ratio of 50 per cent, 15 per cent and 35 per cent respectively.  Thunuguntla clarifies that “If the promoters are diluting less than 25 per cent stake in an IPO, QIBs get 60 per cent reservation, retail 30 per cent and NIIs 10 per cent.”

Retail investors and HNIs are allotted shares on a proportional basis. For example, if the IPO of ‘X’ was subscribed two times in the retail category (if you have applied for 200 shares, you will qualify for 100 shares,ie, 200/2). Similarly, an HNI will get eight shares, if the category was subscribed 24 times.

If the subscription is huge or the price is very high, the allotments are made by lottery. Say, you apply for five shares and the category is subscribed 10 times. In this case, you are entitled to half a share. Since it’s not possible, the company may allot shares to one out of every two investors.

Equities are graded on a scale of one to five. Higher the rating, better is the issue but then the grading is only for fundamentals and does not cover the issue price/valuation. In the sense, a good rating may mean a good company but may not give listing gains.
The basic thumb rule to determine valuation is by calculating the price-to-earnings (PE) ratio, done by dividing issue price by earnings per share (EPS) of the company. For instance, the issue price is Rs 100 and EPS Rs 10, the issue price is 10 times (PE multiple) of EPS.