“An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s
favorable to you”- Warren Buffet
Primary market an incisive storyline
The Primary market has evolved to become a billion dollar industry owing to the bullish conditions in the market. This is rather evident from our previous reports, which show a positive outlook for the primary markets over the past few months.
As a wise trader once said “Behind every high return, there is always a story to extrapolate”, we are here scavenging for that story in context of the Primary Market conditions
Let us consider two hypothetical characters- Tom and Sam. They have an interesting story that is bound to get investors intrigued! Although it might seem like a sugar-coated tale talking about attractive returns in the primary market, this story possesses a lot of intricacies for investors to indulge in and learn from.
A decade ago, when Tom was one of the thousand investors in the primary market, the trend of Initial Public Offerings (IPOs) was at a nascent point. However, once IPOs started giving returns on a large scale, it led investors as well as the companies to believe that the Primary Market may be the next best thing in the equity market.
However, when more and more companies started issuing shares to public, the modern markets started witnessing participation of a diverse nature of investors in the market, such as NII (Non-institutional investor) and QBI (Qualified Institutional investor) instead of being restricted to just RII (Retail Individual Investors).
For Sam, who is a new investor in the market, these players play an important role in his decision making in the primary market. Unlike Tom, the primary markets may not yield desirable results for Sam in the long term.
Recommended read: IPO: riding the bull market
Are Primary Markets a False hype for the Economy?
To answer the question of whether the Primary market is a frenzied scheme or sanity for Investors, we need to unmask the hidden players in the Indian primary market.
In our analysis, we have found that primary markets are nothing but a replica of the traditional marketplace for buyers and sellers, with a few additional complications. Traditionally, shopkeepers or retailers buy goods at a wholesale price from manufacturers and sell the goods at retail prices in their stores, creating stimuli in the market, for themselves and the customers alike.
Similarly, retailers are the main indicators of a possible boon or bane in the primary market. Retailers were mainly the larger institutions and smart buyers who buy at low or wholesale prices and subsequently sell in the markets beyond the prices in the primary market, creating an atmosphere of wealth creation.
Institutions/smart buyers view primary markets as a secure door to enter the equity arena, considering it safer than any other sector. They buy at a low price and sell it at a higher market price, inflicting the risk on their own self. The reason this risk is borne is that when the retailers participate in large numbers, they will either incur heavy losses if market prices fall beyond expected, or they upraise the market price, creating more demand and supply.
This phenomenon of buying and selling, at low and high prices respectively, creates a scenario of unjust market prices. But the key difference between a traditional marketplace and primary markets is in the number of investors, as traditional markets talk about a minimal number of buyers whereas capital market retail investors run into the millions; thus exacerbating subscription of shares by individual investors.
For example, the last 8 months witnessed high oversubscription by retail investors, wherein companies like SIS and matrimony saw subscriptions by RIIs at 10 times the subscriptions by qualified institutional bidders and high net worth individuals.
Recommended Read:A Look At Primary And Secondary Markets
A Little Sidebar
Sensex and nifty have been shooting to all-time-highs for the past few months and the primary markets have also not failed to be buoyant.
When CDSL made its debut on Dalal Street with its IPO launch in FY17, brokers and investors went head over heels as they never expected a security depository to be quoted on the NSE. Shortly after its debut on the NSE, CDSL saw a massive oversubscription by 170 times at the close of bidding, including around 22.98 times oversubscription by retail investors. The stock has generated a return of around 120% as of Jan 2018 against the issue price of ₹ 149.
Surely, high returns and oversubscription might have an exaggerated effect, particularly for institutions and smart buyers; but pricing is the principal reason for them to enter this zone in the first place.
At the time of the Anticipation Crisis in 2007-08, an average of 2 IPOs per month was issued at the lowest prices, making retail investors’ quota oversubscribed by 18.42 times, highest ever in history.
Retail participation was high in the years 2007 and 2008 accruing to a bull market run of 4-5 years. At the time of the bullish market, average numbers of IPOs per month were around 2 in 2007. However, by 2017 the numbers had increased to almost 7 on an average.
Oversubscription is nothing but an added sparkle in the Primary market feign, resulting from incisive speculation by echelon investors.
Many investment bankers and advisories would advise new companies to enter the primary market when they witness high leverage in the economy. Promoting new companies to enter into the market is also a primary job; wholesale institutions and smart buyers enter at a larger scale, as they know the stimuli created by them would eventually drive up the prices of stocks of these companies.
These drivers are something that all investors need to be wary of when they have high hope in a bullish market.
ALL in ALL
The Retail Individual Investor perceives the primary issue of shares by a company to be a mystical being that appears at special times and makes investing worthwhile, however, holding shares bought in the primary markets, do not always build wealth over time. For Instance,In August 2017, despite the stock market trading at new lifetime highs, 48% of the companies that launched an IPO in the last decade saw their stock fall below their issue price.
So What’s the best time for investors to enter the market?
A LOT OF INVESTORS WOULD still be bewildered about the optimal time to enter the market. we suggest THEY ALWAYS keep THE COMPARISON OF P/E RATIO TO BOND YIELDS in mind! S