Liquidity crisis hammers IPO segment in 1H2019; revival in H2 unlikely

Experts who spoke to Moneycontrol don't expect a revival in the primary market unless liquidity coming back as normal.

The first half of 2019 witnessed underperformance in not only the broader market but also in the primary market, even though benchmark indices recorded strong returns.

Only six initial public offers came out in H1, of which, three came with an issue size of more than Rs 1,000 crore, while the remaining raised less than Rs 500 crore each. In comparison, 13 companies came out with IPOs in the corresponding period of 2018.

The six IPOs raised about Rs 2,265 crore through the main board, whereas 3 IPOs were listed on the SME platform.

The initial public offering of Polycab India and Neogen Chemicals received an overwhelming response, getting subscribed by 52 times and 41 times respectively while the other four - Metropolis Healthcare, Chalet Hotels, MSTC, and Rail Vikas Nigam saw subscription in the range of 1.5-6 times.

Nonetheless, the performance of the stock was strong, except MSTC, which lost 33 percent from its issue price.

Neogen Chemicals was the biggest gainer among the six stocks, rallying 65 percent since issue, followed by Rail Vikas Nigam (39 percent) and Polycab India (13 percent). Metropolis Healthcare and Chalet Hotels gained more than 9 percent.

The main reason for lower buoyancy in primary, as well as broader markets, was liquidity crunch that started in September 2019 with IL&FS and was later felt by sectors like auto, realty. The BSE Midcap and Smallcap indices lost 4 percent in January-June 2019.

Even in the case of benchmark indices, the rally of 9 percent was driven by a few select stocks which were only on hopes of optimism.

According to experts, the lack of liquidity in the market, at the time where sectors and mutual funds are getting less incremental money from investors, is making it difficult for the companies to come out with IPOs even though SEBI has given a go-ahead to most of them.

"The reason for muted primary market is that they don't get right valuation in current market condition and major reason is that there is not too much funding happening in the market (look at real estate, NBFCs, auto) which created a lot of uncertainty in the market," Shailendra Kumar, CIO at Narnolia Financial Services told Moneycontrol.

Sameer Kalra, Founder of Target Investing also said ETF money has been chasing large-caps which resulted in 9 percent rally in Sensex and Nifty, but DIIs, which majorly included mutual funds, are not getting incremental money, barring consistent SIP money although it is quite minimal. This has impacted not only broader but also primary markets.

Even merchant bankers are not excited enough and main investors in IPOs are anchor investors which are mostly mutual funds which ultimately are not getting enough money to invest, he added.

Even if we see the record of draft red herring prospectus by companies on SEBI, the number of filings was quite less compared to the last six month of 2018. Only 16 companies filed DRHP with SEBI in 1H2019 against more than 40 in 2H2018.

Experts which spoke to Moneycontrol don't expect a revival in the primary market unless liquidity coming back as normal.

"Liquidity stress is the main cause of concern now, so I don't expect any strong revival in the primary market in the next six months but there could be U-shaped recovery in liquidity by the end of December 2019," said Shailendra Kumar who sees buoyancy in the primary market as well as key sectors in next year only.

Sameer Kalra, Founder, Target Investing feels till the time MF don't get enough money, which could be seen by end of 2019 or in the first half of 2020, revival is unlikely in primary as well as broader markets.

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