Is Speciality Restaurants' IPO really a success?

It was not smooth sailing for the Speciality Restaurants’ IPO, but in the end, the book was subscribed over 2.5 times on the last day, making the offer by all means a success. However, can it really be considered a successful IPO if the retail book was undersubscribed?

Even though it ended on a good note, it was a bumpy ride for the company. Demand was weak on the first two days, and only on the last day did offers come pouring in. In an interview to CNBC-TV18, explained V Jayasankar of Kotak Investment Banking explains that this phenomenon is not surprising because of the Indian market’s 100% cash margin rule. “Institutional investors tend to come on the last day because no one wants to block their money for the first one or two days,” he explained. He further adds that the lack of US investors was another reason for the bulk of the demand coming in on day three. Commenting on the weak demand from the retail side, Jayasankar says that it is more difficult to influence the retail mood given the fall in the market. “You must realize that retail investors tend to be far more sentiment focused than fundamental focused,” he added. Also read: Are investors hungry for Specialty Restaurants' IPO? Below is an edited transcript of his interview with Mitali Mukherjee and Reema Tendulkar. Also watch the accompanying video. Q: What’s the mood like in the IPO market? Speciality IPO sailed through, it got a decent response, but prior to that companies had to withdraw due to lack of appetite. Are we seeing a lot of small and midcaps cuing up go in for an IPO? A: I would say the Speciality Restaurant IPO which closed successfully augers well for capital markets because it shows that the markets are open in pockets. What we did was we kept the timing of the IPO very flexible and focused on building a very strong momentum with institutional investors. The moment we saw demand build up, that’s when we launched that transaction. In that sense, you can say that on the back of a strong demand momentum for institutional investors, it is possible to get transactions successfully done in this market. Q: Not that smooth though in terms of sailing. Large part of it happened at the very tail end of the day and you still didn’t manage to get even one times in terms of retail. The big criticism was that perhaps Speciality had been over priced and was way too expensive for a market like this especially. How would you respond to that criticism and the point that retail is still not coming into some of these issues? A: Let me take that into two separate parts. The first part is about the response coming on the last day. You have to realize that the Indian market is very unique because we are perhaps the only market that asks for a 100% margin which means that every application has to be backed by 100% cash margin. Therefore, what tends to happen is all institutional investors and all other category of investors tend to come on the last day because no one wants to block their money for the first one or two days. So bulk of the response coming on the last day is kind of a given when you have a 100% cash margin. Secondly, this was a transaction where US investors could not participate. So typically what happens is that you do find some US investors put in demand on day two because day three doesn’t really work fine for them. But since we did not market to the US investors, we didn’t have demand from them. So therefore you saw bulk of the demand coming on day three. Coming to the retail investors, I want to highlight two points. Point number one, when we launched a transaction, the Sensex was little above 17,000. On the day that the transaction opened, the Sensex fell by about 325 points and on day three the market opened weaker with the Sensex going below 16,000. So you must realize that retail investors tend to be far more sentiment focused than fundamental focused. So though we knew that the institutional demand was very strong, we were anticipating between four-five times the QIB book, it is not really possible to influence the retail mood given the fall of Sensex by about 1000 points on the last five-six days and given what had happened to some of the other IPOs in the recent past. There is so much talk about problem in Europe, there is so much talk about problems in India sometimes a bit too, and some of these really impact retail investors much more than the institutional investors. _PAGEBREAK_ Q: In a market like this, do you think it’s fair to put out an issue that’s priced at 27 times at the upper end and not leave a whole lot on the table in terms of post listing gains or potential post listing gains? A: I was coming to the valuation point that you raised. What I want to emphasize over here that we listen to the investor feedback extremely carefully on valuation because in a market like this it is important to ensure that you market and position the valuation appropriately. Therefore, if you look at the quality of the anchor book, you have seen the names that have come and all these are high pedigree long only accounts and we saw similar response even the main book. So if you look at it from a participation stand point, you have some very high quality investors who have bagged this company. They recognize that this is a play on the consumption theme, they recognized that this is the only fine dining restaurant that has truly scaled up in the Indian market and they were comfortable in valuation. With retail investors, you are right, if you talk about a nine month annualized number and try to look at the valuation, it is probably a little difficult for them to understand and appreciate valuation. But when you start looking at the trends of the last few quarters and you start looking at the potential for the business and what the growth capital can do, that’s when the valuation picture falls in place and that’s not easy for a retail investor to really understand. That’s why I emphasize that retail investors influence far more by sentiment than by fundamentals. Q: With respect to the divestment plan, which IPOs via the OFS  route do you expect to come through? Will they meet their target of above Rs 30,000 crore that they have set out? A: You have heard it in the recently announced budget that the government wants to raise about Rs 30,000 crore by way of disinvestment. This is only the beginning of the fiscal year and I am sure that this time around government will probably not keep it completely back ended and will start taking steps towards raising this quantum. Since it is only the beginning of the fiscal, we probably will have to wait for the government to come out to definitive plans. Q: What is your own sense of what the pipeline may look like this calendar year and whether most of it will be structured via the auction route or could it take on the form of direct offerings whether in the form of follow on or initial public offers? A: In the recent past I think government has made it very clear that they prefer the OFS route compared to the FPO route because the process of FPO is so lengthy and it involves so much of cost involvement and often you don’t get the optimum pricing. So the government I think has in a way clearly made up its mind to adopt the OFS route and wherever primary money is needed, they may look at the IPP route. Another point is that they have already announced in a few cases like BHEL and SAIL that they will raise money through offer for sell by the government. The timing is not yet decided so at some point in time, whenever these will been announced, I think the government will seriously look at what is the right timing for making an OFS. Apart from that, there are so many other companies where the government can consider. These are companies where they have not yet made a decision as to whether they should tap these companies to realize some of their disinvestment target.