Plagued by unfavourable capital market conditions, IPO activity has slowed down. Pharmaceutical companies too have grown wary of playing the IPO card, reports Usha Sharma
As per a report from SMC Global Securities Report in 2012, 42 Initial Public Offerings (IPOs) have been deferred due to the current capital market for uncertain period. The Indian pharmaceutical industry has not been immune to the unfavourable capital market conditions. According to the same SMC report, two pharma companies, Glenmark Generics and Marck Biosciences, who had plans for IPOs in FY March 2011 — February 2012 for Rs 570 crore and Rs 55.34 crore respectively, deferred their IPOs. In a similar vein, Arch Pharmalabs had received SEBI consent for launching its IPO in November 2011, but the company waited almost six months to understand the recent volatility in stock markets which is causing the dormancy in the IPO market. Intas Pharma and Calyx Chemicals are also planning to tap the IPO market, in June 2012 and August 2012 respectively. Intas and Arch are both backed by high profile private equity investors. For instance, Kotak PE is an investor in Intas. Further, Arch had funding from investors such as ICICI Ventures, Granite Hill, Swiss Technology VC Fund.
 “Deferment may not harm a company’s image. But, under subscription can affect company image. Because of this, companies prefer deferment rather than under subscription risk. Even if a company defers its IPO, nothing stops the company from re-filing the prospectus with SEBI and re-initiating the IPO process.” D K Aggarwal CMD, SMC Investments & Advisor |
Sharing his market analysis, DK Aggarwal, Chairman and Managing Director, SMC Investments and Advisors says, “The market conditions have not been exciting in the past two years. A healthy IPO market requires a healthy secondary market which was missing. So, activity on IPO front got subdued. There is no specific issue for the pharma industry as such. It’s a case of a market — wide slowdown and lack of IPO activity. In fact, pharma sector being a defensive sector, there is a decent chance that investors may find this sector interesting. Hence, a quality pharma company at right valuations, shouldn’t find any problem in having a successful IPO.”
 “Definitely, it harms company’s image in the market but more than that it impacts the company’s ability to raise capital to finance their expansion projects, which could eventually result in a slowdown in capacity building and job creation.” Abhishek Goenka Founder & CEO, India Forex Advisors |
Abhishek Goenka, Founder and Chief Executive Officer, India Forex Advisors explains the reason behind the market’s ups and downs, saying, “The ongoing turmoil in the capital markets has been the main cause behind these IPO’s getting deferred. Many companies were averse to hit the market because of the subdued market conditions, as well as the fact that firms that did implement their public stake sale plans are trading below the issue price; like Brooks Labs which was offered at Rs 100 and is currently trading at around Rs 17 in less than a year. Claris Life Sciences was also one such case which got a lukewarm response from the market.”
 “We have called off our IPO not because our company is not performing or trying to escape from its business plans but because of the poor primary market, uncertainty on the political front front and less number of FDI entries in the last one year.” Bhavesh Patel Mng. Director, Marck Biosceinces |
Bhavesh Patel, Managing Director, Marck Biosciences, explains the reason behind the investors’ sentiments, “We have called off our IPO not because our company is not performing or trying to escape from its business plans but because of the poor primary market, uncertainty on the political front and decreased FDI entries in the last one year.”
But the IPO dream still lives on. Patel is optimistic that the company will launch its IPO some time in the future. But the company does not know when since everything depends on a healthy and positive market from both an investor and company’s point of view.
 “We too have deferred our IPO plans given the current uncertainty for primary issuance. We think these are macro issues and not limited to our sector.” Ajit Kamath CMD, Arch Pharmalabs |
Ajit Kamath, Chairman and Managing Director, Arch Pharmalabs revealed that they too have deferred their IPO plans given the current uncertainty for primary issuance. The company thinks that these are macro issues and not limited to the sector.
On the IPO front, it seems that ‘no show’ is better than a ‘poor show.’ Aggarwal explains the impact of an IPO call off saying, “Deferment may not harm a company’s image. But, under subscription can affect a company’s image. Because of this, companies prefer deferment rather than under subscription risk. Even if a company defers its IPO, nothing stops the company from re-filing the prospectus with SEBI and re-initiating the IPO process. Further, even after SEBI approval, companies have about a year’s time to come out with a public issue. Hence, several companies prefer having SEBI approval and waiting for the right market conditions to open their public issue within a year’s time period.”
| Key reasons for not completing the investments |
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| Source: Protiviti AVCJ Survey 2011 |
Goenka too agrees that an IPO call off process harms company’s image in the long-term process. He avers, “Definitely, it harms a company’s image in the market but more than that, it impacts the company’s ability to raise capital to finance their expansion projects, which could eventually result in a slowdown in capacity building and job creation. This definitely derails the overall company’s vision and plans for the next three to five years. For instance, it must be using the funds for repayment or prepayment of its long-term funds/debt or capital expenditure towards its existing manufacturing facility. It also doesn’t go well with the PE funds out there who generally invest in unlisted companies in the hope of a later exit through IPOs.”
He shares a successful story on similar lines that MCX has deferred its IPO at least three times in the past four years. Even then there was no harm to the MCX brand. Further, when MCX actually hit the market in March 2012, it got a massive response. So, success eventually lies in the quality of the company and reasonableness of IPO pricing, rather than on the defferment.
Chasing the game
In India, the capital market is predominately regulated by the Capital Market division and Department of Economic Affairs, Ministry of Finance. It is responsible for the institutional reforms in securities markets, building regulatory and market institutions, strengthening investor protection mechanism and providing efficient legislative for securities markets. In the recent past the number of IPO announcements have gone down. According to the key decision makers from across the industry one of the key reason for unsuccessful IPOs is the strict SEBI guidelines. In the past, many small companies had tried to manipulate investor sentiment and to regulate such manipulation SEBI recently put out stringent norms for bankers to public issues. To enable investors to take better decisions while shelling out money, the market regulator recently made it mandatory to disclose the track record of the bankers and the pricing rationale for all public issues. This move assumes significance in the backdrop of the poor performance of newly listed stocks through IPOs.
As per a report from Protiviti Consulting the pharma sector has returned to the fore, which been followed by FMCG, education and energy. It has witnessed some significant deals in the first half of 2011. The report predicts that the flurry of changes to existing regulations and proposed regimes reflected a mixed mood in the investment community — while changes to the takeover code raised hopes of greater investment activity, new Alternative Investment Fund (AIF) regulations are expected to depress activity. Direct Tax Code (DTC) did not reflect very actively on respondents’ radar as affecting investment activity. Considering there may be more in store, the PE community will be keeping a close vigil on these developments as they unravel.
| Which sector is most promising for investment over the next 12-18 months? |
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| Source: Protiviti AVCJ Survey 2011 |
Under observation
 “With the uncertainty in the capital markets and a slower growth rate around seven per cent predicted for the Indian economy, we foresee the same trend to continue where very few low transactions IPO will continue to happen but the big movers will not take the centre stage.” Dr Ajaykumar Sharma Practice Head-Pharma Healthcare Practice South Asia, Middle East and North Africa Frost & Sullivan |
Dr Ajaykumar Sharma, Practice Head-Pharma, Healthcare Practice, South Asia, Middle East and North Africa, Frost & Sullivan shares his reading of the current market situation, “The overall capital market has not gained the much needed momentum for the companies to actually launch their IPO’s. Even the lukewarm response to the follow on IPO of ONGC has not helped build confidence among the investors. As for Glenmark, with the Astrazeneca research deal passing through, with improved cash flow it did not feel the pressure to go for the IPO as planned and hence the decision to defer.”
“With the uncertainty in the capital markets and a slower growth rate around seven per cent predicted for the Indian economy we foresee the same trend to continue where very few low transaction IPOs will continue to happen but the big movers will not take the centre stage,” adds Sharma.
With recent volatility in stock markets causing dormancy in the IPO market and historically unsuccessful promoter buybacks, secondary and strategic sales were the preferred exit choices of respondents.
There is a confidence that FY 2013 will be probably better than FY 2012, as RBI has started interest rate cuts. Hence, the GDP growth can recover during FY 2013. Hence, this can be a positive for secondary markets as well as for IPO markets. Hence, the trend in FY 2013 can be positive suggesting that companies planning an IPO need to start cleaning up their balance sheets right now. Listing some steps, Aggarwal says, “The company should have a healthy balance sheet. A healthy profitability, reasonable pricing, and brand image are also important. Further, the company should comply with all SEBI guidelines associated with the IPO process. The company should engage a good merchant banker to market the issue effectively.”
He also suggested that companies should look at other available avenues for fund raising which includes VC and PE funds, ECB, FCCB, etc. In the recent years, pharma companies had received funding from various VC and PE funds. Some of key deals in pharma sector include Olympus Capital Asia Investments investment of over Rs 500 crore ($100 million) for a significant minority stake in DM Healthcare.
Goenka too suggests that “Companies should be in a wait and watch mode before tapping the IPO route in the current market scenario. They should be looking at other quasi debt or equity options. Since the rupee has depreciated close to 52 levels and levels like 53-54 looks possible in the current scenario, companies should time the market and opt for ECB’s and other sources of dollar funds at these rates and pay back or hedge when the rates of dollar rupee are favourable close to 48-49 levels. I do not think there is much point in raising equity in such markets, but again this depends on case to case.”
Out of the proposed three pharma IPOs, Arch Pharmalabs has already confirmed that it will hold back its IPO till the right capital market conditions prevails. Will the rest follow suit or decide to take the risk and play the IPO card? Only time will tell.
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