The success of the Equitas IPO throws up some interesting learnings:
1) Who needs FIIs?
Under the banking licensee requirements, the company had to bring down foreign shareholding to under 49%. This regulatory requirement restricted foreign institutional investors (FIIs) from participating in the IPO.
Foreign shareholding in Equitas stood at 92.64% before the IPO.
Never before an IPO deal of Rs.2,176 crore had been sold only to domestic investors and naturally bankers to the issuance were jittery.
However, at the close of the IPO on Thursday, the institutional investors’ category was subscribed nearly 15 times, while retail and high net-worth individuals categories were subscribed 1.4 times and 57.3 times, respectively, according to data from stock exchanges. Clearly, there was no shortage of demand for the Equitas share sale.
Since last year, domestic institutional investors (DIIs), especially mutual funds that are flush with cash, have stepped up their participation in IPOs.
In December, Mint had reported that of the 21 IPOs that have hit the capital markets this year, DIIs bought more than half the anchor book in at least 12 public issues. The anchor book is that portion of the IPO that bankers can allot to institutional investors on a discretionary basis.
No one missed the FIIs.
2) Domestic investors don’t shy away from untested models
One of the concerns about the Equitas offer was that while the company showed exceptional performance as a microfinance institution, it was to soon become a bank.
Unlike a non-banking finance company that it is, it can no longer depend on financing such as term loans from banks and will need to take deposits from customers (apart from other forms of financing), a completely new way of doing business for the company.
The transition is expected to hurt the company’s profitability in the near to medium term.
However, this change in the way of doing business did not deter domestic investors. The fact that the company had undergone the rigorous scrutiny of the Reserve Bank of India to win the licence and the case study of Bandhan’s transformation from a microfinance institution to a universal bank gave investors the confidence to invest in Equitas.
3) Who’s the boss?
One question that is always on the minds of investors, especially domestic ones, looking at IPOs is: How much skin in the game does the promoter have?
Most listed companies in India have promoter holdings of at least around 50%.
But P.N. Vasudevan, who founded Equitas, has just around 3% stake in the company. In fact, he is not even recognized as the promoter of the company.
“Our company is a professionally managed company and does not have an identifiable promoter...,†reads a line displayed prominently on the front page of the company’s prospectus.
The impressive track record of the management and the high levels of corporate governance, thanks to a large of international investors in the company, must have helped assuage investor concerns about there being no promoter in the company.
Domestic investors seem to be warming up to the idea of professional, management-driven corporations. This change in perception is bound to help several companies, especially new-age tech companies that are majority owned by private equity and venture capital funds, when they turn up for listings.
4) Valuation is king
The bargaining power of DIIs, in the absence of FIIs, helped bring the valuation substantially lower than what the company was able to garner in past private funding rounds.
At the upper band of the offer price, Rs.110, the issue was priced at a diluted price to book value of 1.8 times.
Brokerages gave their thumbs up to the valuation of the offer.
“We believe the issue is attractively priced looking at the growth options the company offers in the long run,†said Angel Broking in its research note.
“The IPO looks attractive and the company’s growth potential looks promising at this stage. The IPO is priced at an approx. 50% discount to SKS Microfinance,†said Religare Capital Markets Ltd in its report.
Zerodha (Trading Account)
RHP
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