Notes on Indian equities, sectors and economy

The need for Entreprenuer-Brand

Posted by fairval on January 21, 2008

The success of Reliance Power and Future Capital underscores the role of the ‘entrepreneur-brand’ in a company’s success.

2008 has started off an a dichotomous note. While secondary markets are shaky, the primary market has set off on a scorching note. Both Reliance Power and Future Capital have got strong response from retail investors, despite shaky secondary market conditions. Both are also businesses with a lot of future promise built into issue pricing.
The success of these two IPOs has once again busted the myth that Indian retail investor has no appetite for stock markets and is scared of investing in equities.
Reliance Power certainly overturns all notions of risk appetite of retail investors, or for that matter, institutional investors. The massive Rs 11,700 crore R Power IPO got oversubscribed atleast 72 times, with the retail portion getting subscribed 14 times. The retail portion was 30% of the IPO. This means the retail portion itself generated subscription of around Rs 50,000 crore. This is higher than from the money actually raised by IPOs last year from domestic markets.
The Future Capital issue, which closed just a few days before the R Power issue, wasn’t affected by market turmoil either. It got overall subscription of around 132 times, with the retail portion getting a 54 times oversubscription. This means the retail portion collected around Rs 8150 crore.
This goes to show one thing – retail investors do have the appetite to dish it out. But what was it about these two IPOs which prompted such frenzied response?
In R Power’s case, you could say the large capex required on the power sector is the big explanation. But this explanation falls flat if you compare valuations of R Power with other power generators. R Power asked for a valuation of close to $30bn. The grey market premium suggests a listing price of around $40bn. NTPC, the country’s largest power generation company, with an installed capacity of 28,000 MW gets a valuation of Rs 210,000 crore or around $52bn. R Power has no generation capacity. It will get to NTPC’s current capacity only by 2017 or so, says a research report by HDFC Securities. By that time NTPC may have doubled its current capacity. Citigroup had a ‘sell’ recommendation on NTPC in a report in Nov’07. So clearly, retail investors have given hugely disproportionate valuation to R Power.
Future Capital (FCL) also seems to have benefited from a future promise. FCL asked for a valuation of around $1.2bn. It currently is a private equity fund manager, where it helps manage a funds of size around $1bn. ILFS Investment Managers (IIML), a listed company, is a PE fund manager with a similar size of business, and much longer track record. IIML has a market cap of around Rs 900 crore or $230mn, one fifth of FCL. FCL intends to build a retail finance, but this activity is currently miniscule.
The success of these issues seems to demonstrate that IPOs often sell more on personality than on just the sector story or the company. Both the Ambani and Biyani names are now brands, with direct connect into investor psyches. The ‘entrepreneur-brand’ factor, is perhaps the biggest explanation behind this investor frenzy.
The point to ponder for other entrepreneurs is this – are you okay with being a faceless name or should you be a brand yourself? Good performance will also get you the capital, no doubt. However, good performance combined with direct investor-connect, which an entrepreneur-brand has, will also get you capital at aggressive valuations.
Of course, not all entrepreneurs need to or may want to do this. A good sector or company story will also though mostly see an IPO through, as the success of other recent IPOs like BGR Energy Systems or Transformers and Rectifiers India demonstrates. Both these issues, which came in Dec’07 are trading at significant premias to issue price.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: