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PSU IPOs get cold shoulder from investors

The lack of investor appetite is reflected in post-listing returns on the secondary market.

, ET Bureau|
Updated: Oct 02, 2018, 02.29 PM IST
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Also, large foreign funds look for big IPOs - at least more than Rs 1,000 crore— for sizeable liquidity after listing.
New Delhi is betting big on divestment proceeds to narrow the fiscal deficit, but the response to the initial public offerings (IPO) of state-owned companies in the recent past has been tepid. Of the 10 PSU companies that raised more than Rs 30,000 crore in the past 18 months, six just about managed to sell their IPO stock, with demand at 1.3 times the number of shares on offer.

The IPO of Hindustan Aeronautics Limited (HAL), a manufacturer of fighter planes for the Indian Air Force, was bailed out by LIC, which put in money at the eleventh hour. According to a BSE filing, LIC holds a stake of 7 per cent in HAL. This implies that 70 per cent of the IPO shares were absorbed by LIC as the government offered 10 per cent stake via IPO.

A senior HAL official had told ET during the IPO that there was keen interest from two major global funds during roadshows, but they backed out when the book was open.

To be sure, the likelihood of such blockbuster deals such as ONGCHPCL could still enable the Centre to meet its FY19 disinvestment target of Rs 80,000 crore, believes Prithviraj Srinivas, economist at Axis Capital. In FY18, the Centre raised Rs 1 lakh crore from divestment, and after many years, it was able to cross its divestment target.

But the recent track record is a bit mixed. Due to the poor subscription, the price band for Garden Reach Shipbuilders and Engineers was set lower and IPO period extended until October 5. Historically, price bands in IPOs of private companies have been reduced in the past to attract investors. However, Garden Reach IPO was one of the first shares sales from the government stable where the price band was reset.

The lack of investor appetite is reflected in post-listing returns on the secondary market. Barring RITES and Mishra Dhatu, all the PSUs that raised money in the past 18 months are trading 10-44 per cent below their respective IPOs.


IPOs are not doing well for several reasons. First, the pricing is generally unattractive. For instance, Garden Reach Shipbuilders, a maker of warships for the Indian Navy, priced its sale at 16 times FY18 earnings. By contrast, Cochin Shipyard, the maker of India’s first indigenous aircraft carrier, is trading at 13 times and has better Return on Equity than Garden Reach.

The chief investment officer at a leading domestic asset management company who is having AUM of more than $300 billion said that being a state-owned company, there is significant comfort on the corporate governance. Many companies that raised funds through IPOs have exciting earnings stories, but limited and unproven financial history don’t give funds the confidence to put in huge amounts of money.

“Therefore, unless these PSUs are offered at a significant discount to peers, they will continue to have low investor appetite,” he added.

To be sure, PSUs offered at attractive pricing, such as RITES and Cochin Shipyard, received robust investors interest. Pranav Haldea, Managing Director at Prime Database, said that subdued response to PSUs is related also to market volatility regardless of attractive pricing in some of the share sales.


Furthermore, investors have limited disclosures on defence-focused government companies. For instance, HAL and Bharat Dynamics provided limited disclosure on the nature of defence orders and prospective order pipelines, and these two companies make disclosures complying with section 144A of the US securities act—an additional reporting standard for unlisted Indian companies. This hampered investments of several US funds into HAL and BDL.

Also, large foreign funds look for big IPOs - at least more than Rs 1,000 crore— for sizeable liquidity after listing. Therefore, many IPOs less than Rs 1,000 crore are typically not on the radar of foreign investors.

Finally, some Book Running Lead Managers (BRLM) chosen by PSUs do not have the bandwidth to reach out to large funds or top investors. A lot of prominent BRLMs typically do not participate in small PSU IPOs due to low fees and small size.

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