labels: corporate finance, maruti udyog, passenger cars, investment - general
The bourses rev up news
The spectacular success
15 June 2003

The spectacular success of the Maruti IPO may have its own downsides, but it has pepped up the moribund primary market and ignited investor sentiment

Mumbai: There were times when more than Rs 20,000 crore used to flow in to the capital markets in a single year. Those were the times when the markets were overheated no doubt, but it was enough to indicate that there is a lot of money out there that could be invested in the capital markets.

In recent years, the primary market has been lying in a comatose state. In 2001 there were only four primary issues; in 2002, five; and in 2003, none till June 12, when Maruti Udyog (MUL) came up with an initial public offering (IPO).

The reason for the lack of investor interest in IPOs is not far to seek. Out of the 24 IPOs listed in the last four years, 20 are trading below their issue price and the majority of the stocks traded above their issue price are bank stocks, about which we had written last week.

More than just a fall in prices, what has scared investors is that there are more than 2,000 companies listed with various stock exchanges that have simply vanished without leaving any trace. The promoters of these companies vanished laughing all the way to their banks leaving their investors crying - perhaps all the way to their graves.

The Maruti IPO, where the promoters will not vanish, and MUL, a company of vintage class, may finally change the investor sentiment - particularly the retail investor sentiment towards the primary market.

The Indian government, which owns about 45-per cent stake in MUL, is divesting 25 per cent of it by offering it to the public. The offer is for selling 7.2-crore shares, with a face value of Rs 5 and a floor price of Rs 115.

The offer is through the book building process where the investor can bid at Rs 115 or above. The various bids will lead to price discovery - the real price at which the market is willing to absorb the offer. The offer is open from 12 to 19 June 2003, after which the actual price of the share will be decided.

The size of the issue if the share price is Rs 115 is Rs 830 crore. Of this 60 per cent is reserved for institutional buyers, 15 per cent for high net-worth retail buyers who bid for 1,000 shares or more, and 15 per cent for the retail buyer. If the issue is oversubscribed, 10 per cent of the over-subscription can be retained, once again earmarked for the retail buyer.

The issue got sold out within three hours of its opening and at the end of the first day it was over-subscribed by 1.45 times. At the end of the second day the over-subscription was 4.19 times. At this rate, market men predict that by the time the offer closes the over-subscription could as well be 10 times.

A stunning success - this could be good news as well as bad news.

The good news is that happy days are here again for the primary markets. The interest shown so far is by institutional buyers. On the first day the retail interest was lukewarm, and slightly better on the second day. This, however, is a normal scenario under the book-building route where retail interest is evinced at the closing days of the issue. At the time of closure it is expected that that the retail portions of the issue will also get over-subscribed.

The bad news is that many investors will now enter for speculative reasons. If an issue is over-subscribed by 10 times, it means the demand for the stock is 10 times its supply. Thus, in keeping with the law of demand and supply, the stock, if priced at Rs 120, could well jump to Rs 150 in a few months when it is listed in the exchanges.

The investor will, therefore, realise an annualised profit of more than 100 per cent - a once-in-a-lifetime kind of opportunity, and he will book his profits by selling the stock. The stock price will consequently fall.

There are downsides for the long-term holder of the stock, too. MUL's present share of the car market is a little above 50 per cent. But this market share has eroded from about 80 per cent to 50 per cent in the last three years and there is all likelihood that MUL's market share will fall further in the years to come given the nature of the competition and the entry of more players in the market.

Further, MUL's bread, butter and jam even today is the 800cc, which costs about Rs 2.25 lakh. Telco, which is giving MUL a run for its money, has promised to come up with a car costing Rs 1 lakh by 2005. Okay, even if Telco's car is finally priced at Rs 1.5 lakh, it will change the dynamics of the car market altogether.

Finally the government will still be holding about 20 per cent of the MUL stock which it can offload in the market at a later date. This will dilute the existing shareholders' stake in the company.

Never mind the downsides, this is not the time to play party-pooper. MUL deserves all the kudos for lighting up a moribund market. The success of this issue will enable other vintage companies like Nalco, Bharat Petroleum, Tata Consultancy Services, and Patni Computers to come up with IPOs. Then smaller, unknown and good companies could follow.

Let us, now, remember that Infosys was a small, unknown entity till it entered the capital market through the IPO route.

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The bourses rev up