Ripples Advisory, High IPO valuations are driving investors away from market
That ICICI Securities IPO size had to be cut and Hindustan Aeronautics’s offering wasn’t even fully subscribed shows investors cannot stomach costly IPOs anymore
Equity markets have corrected considerably in the past two months. But those in the primary market are acting as if the bull market is alive and kicking. The initial public offerings (IPOs) of ICICI Securities Ltd and Hindustan Aeronautics Ltd (HAL) failed to get enough bids to meet their targeted issue size, and experts have squarely blamed the rich valuations these companies were demanding.
The ICICI Securities issue fared the worst this month, receiving bids for only 88% of the total shares on offer. The pricing was steep, and failed to provide a buffer for investors in case markets fell during the book-building process, pointed out a merchant banker. As it turned out, markets fell late last week owing to heightened fears of a trade war between the US and China, and unsurprisingly, bids for Indian IPOs started to dry up.
Another expert on the primary markets said the brokerage business is cyclical and that it was foolhardy to price the issue at 30-times earnings just when the cycle had begun to turn south. He says that the euphoria in the primary markets isn’t limited to large companies, but is also visible in SME (small and medium enterprise) IPOs. These companies are demanding valuations of 20-25 times earnings, despite the bigger fall in small-cap stocks in the secondary markets. While the BSE 500 index has fallen 9% from its peak in January, the BSE SmallCap index has fallen 14.4%.
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