“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
In our first report on the positive outlook for the Primary market in last few months, we saw how the bullish market created an opportunity for the Primary market to be a billion dollar Industry.
As a wise trader once said “Behind every high return there is always a backstory to extrapolate”
Tom and Sam have an interesting story to tell all investors. Although it might seem a sugar coated storyline for high returns in the primary market; but, this story has alot of intricacies for investors to indulge on.
A decade ago, when Tom was one of the thousand investors in the primary market, the trend of Initial public offerings was at a nascent point in the market. However, once IPOs started giving returns on a large scale, it transcended investors as well as the companies in believing that Primary market may be the next best thing in the equity market.
However, when more companies started issuing shares to public, the modern markets started witnessing a diverse nature of investors participating in the Primary market, such as NII (Non-institutional investor) and QBI (Qualified Institutional investor) and not only Retail Individual investor.
For Sam, these players play an important part for his decision making in primary markets, but unlike Tom, the primary markets may not yield the desirable results in the long term, for Sam.
Recommended read: IPO: riding the bull market
Are Primary Markets a False hype for the Economy?
Well, to answer the question on whether the Primary market is a frenzied scheme or sanity for Investors, we need to discover hidden players in the Indian primary market.
In our analysis, we found that primary markets are nothing, but, a replica of the traditional marketplace for buyers and sellers. 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 as well as for the consumer.
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 than any other sector. They buy at a low price and sell it at a higher market price, hence, transferring the risk to themselves. The reason the risk is being transferred 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, creating a scenario of unjust market prices. But, the key difference between a traditional marketplace and primary markets is in the number of investors, as 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 rallying around to all time highs in history for the last few months and the primary markets have also not failed to be buoyant in same time periods.
When CDSL made its debut on Dalal street with its IPO launch in FY17, brokers and investors were head over heels; as they never expected a security depository to be quoted on the NSE. Shortly after its debut on the NSE, it 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.
For sure, high returns and oversubscription might have an exaggerated effect, particularly for institutions and smart buyer; but the main reason for them to enter this zone is all because of pricing.
At the time of 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 the history.
Retail participation was high in the years 2007 and 2008 on the rear of a bull market run of four to five years. At the time of the bullish market, average numbers of IPOs per month were around 2 in 2007, however, by 2017 the numbers have increased to almost 7 on 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?
Well, a lot of investors would be wondering when they should enter the equity market. Our advice would be that they should always look into the comparison of P/E ratio to Bond Yields.
Mudraksh and McShaw Asset Management analytics