The week ended 17 July will go down as the tale of 2 IPOs, although one of them was an FPO. The Rossari IPO was open for the first 3 days of the week while the Yes Bank FPO was open for the last 3 days of the week. However, the IPO response was diametrically opposite in both the cases. While the Rossari IPO got oversubscribed 79 times, the Yes Bank FPO did not even get subscribed 100%. Even that was bailed out by the QIB portion with 1.9X oversubscription while there was tepid response to the HNI and retail portions. What explains this divergence in response?
All about sectoral economics
One view in the market was that the name Rossari Biotech helped the cause as these sectors are hot in the midst of the COVID pandemic. However, that is unlikely to have helped much. It was quite clear that Rossari was largely a specialty chemicals company and only partially into biotech. Specialty chemical companies have been in the limelight due to the Chinese supply slump and that worked in favor of Rossari IPO. It does have a 10% exposure to animal proteins and that added to the flavor. On the other hand, Yes Bank has just come out of a massive restructuring. Also, many retail investors in Yes Bank were not happy with the previous 3-year lock-in plus the write-off on the AT1 bonds. Investors were also worried about the likely impact on Yes Bank once the EMI moratorium was lifted.
Questions on valuations
Investors were also concerned over valuations of Yes Bank. In the case of the Rossari IPO, the company was in a sector that was growing and quoting at very reasonable valuations. Rossari is a genuine profit making company with marquee clients representing literally, the who’s who of the corporate world. Yes Bank had a plethora of problems. The stock had crashed more than 95% over the last one year and the depth of the problem is still not known. The CBI investigations into promoter dealings will continue to be an overhang. Above all, Yes Bank equity gets diluted to 2400 crore shares post this FPO. Each year, Yes Bank will have to earn Rs.2400 cr of profits to report an EPS of Re.1. That looks very doubtful, to begin with.
The IPO Catch-22 situation
In a way, Yes Bank FPO was also the victim of what we call the IPO Catch-22. Normally, it is the HNI portion that leads the oversubscription. But HNI portion is largely driven by funding applications. Now, banks will be willing to fund an IPO only if the oversubscription is big as that is when they make money. It was quite clear that an Rs.15,000 crore FPO will find it tough to get oversubscribed. That meant, limited funding options. The FPO was priced at a huge discount to the market price and that worked as a dampener. For the individual investor, Rossari was the clear preference. ©