Promoters, selling investors feel they lose out when IPOs do well after listing: Centrum’s Mridul Mehta

Mridul Mehta, Partner Investment Banking at Centrum Capital

As the secondary markets scale new heights, the primary markets are booming with small initial public offerings. Mridul Mehta, partner for investment banking at Centrum Capital, spoke about IPO pricing and other trends in the primary markets in an exclusive interview with Moneycontrol.

How does the IPO pipeline look?

The pipeline appears promising, though investors are becoming circumspect about valuations. There is optimism wherever promoters are willing to adjust their valuations. For capital markets, it's definitely looking positive.

Give us a sense of the kind of IPOs lining up…

I see fewer large issues on the horizon. The trend suggests that sub Rs 1,000-crore issues will continue to be prevalent, with the occasional Rs 2,000-crore or Rs 5,000-crore issue emerging. However, I don't anticipate too many major issues because they need active participation from foreign institutional investors, who have turned lukewarm recently. Even though domestic institutional investors have been the most active in the last six months, they lack the appetite for absorbing large issues.

Are there specific sectors you believe will dominate the IPO scene?

The manufacturing sector is expected to make a comeback. Historically, BFSI (banking, financial services and insurance), healthcare, and relatively capital-light sectors have dominated the IPO scene. However, manufacturing is expected to see an uptick, driven by interest in production-linked incentives (PLI) announced by the government. Even though PLI allocations are relatively small, we are witnessing growing interest in the manufacturing sector.

Issues from new-age companies are still a few quarters away, after the pain of the few earlier failures is forgotten.

Typically, in a bull market, you see a lot of BFSI issues. In the last five to seven years, the largest issues have come from the BFSI sector, but in the current bull run that has been missing.

Why is that? The need for capital is obvious…

This is because of high valuations, intense competition, overcrowding in certain segments, singular focus on retail/SME lending, coupled with some early signs of stress on the retail side. Investors are indicating that if valuations were adjusted downward, they would be willing to invest.

Mostly, IPOs are going through but even in these markets, most IPOs are coming at valuations comparable to peers in the listed space…

Frankly, during bull markets, IPOs have performed well on listing, and we have seen oversubscribed IPOs even listing with more than a 50 percent premium. What's actually happening is that in IPOs that perform very well post-listing, the promoters and selling shareholders feel they are not getting a fair deal in the IPO. Therefore, there is a constant tug-of-war over pricing.

Another factor is that there is a significant disconnect among IPOs: some are oversubscribed over 50 or 100 times, while others are subscribed two to three times only. There's nothing in between. Ideally, subscription should fall somewhere in the middle to ensure that IPO investors receive reasonable returns, and company/selling shareholders also achieve optimal pricing vis-à-vis comparable stocks in the secondary market.

With abundant liquidity in the market, IPOs have become somewhat like a lottery, which is undesirable, especially for long-term health and positive sentiment of retail investors.

Which IPOs are you most excited about?

We are currently focusing on midsize IPOs, and in terms of advisory, the BFSI sector remains a key area of interest for us. We are actively working on deals involving small finance banks. One key trend we are observing is the consolidation among non-banking financial companies (NBFCs). This is expected to be a significant theme going forward because capital is not readily available for many NBFCs unless they can differentiate themselves.

Why do you say that? After the HDFC merger, about RS 1.5 lakh crore of additional liquidity was made available for NBFCs. Why do you say capital is a constraint?

Debt availability is a significant issue. Lenders who were comfortable with HDFC are not as comfortable with lower-rated NBFCs. As a result, HDFC could have leveraged itself nine to ten times, while credit rating agencies and lenders are reluctant to allow most NBFCs to leverage more than four to five times, without impacting rating. This creates a substantial gap in debt availability, without a concomitant infusion of equity.

Equity is also not readily available because investors are seeking differentiation. Many NBFCs have shifted from wholesale lending to retail, SME and MSME lending, making it challenging to stand out. This is where consolidation becomes a critical theme in the NBFC sector, as smaller NBFCs face growth issues due to paucity of funding on the liability side.

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