InterGlobe Aviation Ltd, which owns and operates India’s most successful and profit-making airline IndiGo, made an impressive debut on the bourses on Tuesday with its share price surging by over 15 percent in early trade.
IndiGo is the second big homegrown Indian consumer brand to be taken public after coffee baron VG Siddhartha listed his diversified entity Coffee Day Enterprises Limited (CDEL), which runs India’s biggest cafe retail chain Café Coffee Day (CCD).
CDEL made its debut on the bourses only a week ago, but met with a lacklustre response from the markets. On November 2, when CDEL’s shares were listed on the Bombay Stock Exchange, it ended the day at Rs 270.15 apiece, down 17.64 percent from its issue price of Rs 328.
On Tuesday morning, CDEL’s shares were trading at Rs 276.10 apiece, up 1.4 percent over the previous day’s closing price. On the other hand, InterGlobe Aviation’s shares had already hit a high of Rs 898 on Tuesday morning after its listing and continued to trade at a 15 percent premium over its list price of Rs 765.
So what sets apart India’s two household brand names in the eyes of the investor?
“CDEL’s IPO was sold on the CCD story, but what investors were getting into was a holding company [CDEL] which had interests in various other businesses that put some questions on the underlying profitability of the café business,” says Sanjay Jain, director at Taj Capital, a boutique investment advisory firm based in New Delhi.
So investors had to digest the fact that CDEL’s IPO was not just about CCD, but that of a holding company, which brought about a complexity issue. “The post listing price of CDEL’s IPO is probably a reflection of the lack of full understanding of the complexities,” says Harish HV, partner, India Leadership Team at Grant Thornton India LLP.
InterGlobe Aviation’s IPO though, says Jain, “was pure play” (not based on a holding company structure) and was sold “on the most successful budget airline of India with its growth story”. But here too, the company’s IPO had struck a sour note with investors as it was shown that the promoters had taken huge dividend payouts.
“However, for QIBs (qualified institutional buyers) wanting to invest in transportation/aviation, this was not to be a missed opportunity given IndiGo’s leadership status and underlying profitable operations, unlike CDEL where there was a doubt on the profitability of the cafe business,” adds Jain.
InterGlobe Aviation’s issue had received a phenomenal response from QIBs where their subscription level was close to18 times of what was on offer to them. In comparison, the QIB subscription level for CDEL was 4.4 times. Overall, InterGlobe Aviation’s IPO was oversubscribed 6.15 times whereas CDEL’s IPO was oversubscribed 1.8 times.
“We believe that the response to CDEL was subdued mainly due to higher valuation compared to global peers like Starbucks, and the complex holding structure that included other businesses not relating to the coffee business, which had negligible or no profitability. As a result, the stock has corrected by 15-18 percent post listing,” says Amarjeet Maurya, senior research analyst (Mid Caps) at Angel Broking.
The IPO market in India has been in the doldrums for several years and is now seeing a revival. “Over the years, the reason for the lack of success in the IPO market was not the lack of public money (look at the success achieved by Bollywood where blockbusters take away a few hundred crores every other month), but the lack of good IPOs which are priced well,” says Harish of Grant Thornton India LLP. He adds, “Investors world over, while claiming to be long term, always want a listing gain and that is the key to creating the next IPO boom.”
That said bankers should probably factor in these issue while pricing to help create a vibrant IPO market, which is the need of the hour.