There was no doubt a lot of backslapping when Hudco’s shares started trading last Friday. The IPO notched the largest ever book for a government divestment. The sell-down received bids worth Rp970bn or $15bn.
Defying convention, the trade went ahead without any help from anchor investors. Yet the institutional tranche was 55.5x covered and retail, 10.8x. And although non-institutional investors like high net worth accounts were allocated the smallest portion of the float, their tranche was 330.4x covered.
The listing offers a snap demonstration of the fervour for Indian stocks and the abundant liquidity available in ECM. But while it is easy to attach superlatives to Hudco, it says little about the health of the wider Indian market.
This is because a few crucial factors came together to make the Hudco IPO the success that it was.
The first is that as a government-backed financier of infrastructure and housing, investors viewed Hudco as an investment grade asset.
It also commanded a scarcity premium from the start, being a rare IPO of a state-owned firm. Including Hudco, there have only been six such listings in the country since 2004, the most recent being NBCC India’s $24m transaction in 2012, according to Dealogic.
The business of providing housing and infrastructure financing has been a top priority of Narendra Modi's reform-minded administration, and Hudco’s prospects are riding on that investment euphoria.
The company’s valuation against comparables played a part. Hudco offered a 2018 price-to-book ratio of 1.2x versus an average 3x-4x for its peers.
Quirk in the system
But perhaps the biggest reason for its outperformance lies in a quirk of India’s IPO bookbuilding system, which encourages extreme instances of inflated demand.
Discretionary allocation by banks is capped at 30% of an IPO for anchor investors. In Hudco’s case, there was no allocation for anchor funds, which meant the shares were fair game to all investors.
But allocations are done on a pro-rata basis per investor type, which rewards those who put in higher bids at the biggest tickets. This means it is to an investor’s benefit to cram as many orders in as possible just to get a sliver of the deal, driving a type of herd mentality where the buyside piles inflated order upon inflated order.
And with Hudco a sizeable but not a jumbo IPO, the odds of being allocated were small at best.
This is unlike in markets like Hong Kong where there is no real cap on cornerstone investors, and the leads have control over allocations to anchor and other institutional investors.
So while Hudco's Rp970bn of demand was impressive, how much was genuine demand, and how much was exaggerated to give investors a better shot at bagging stock?
There is no denying that Indian ECM is undergoing a resurgence, and there'll be many more backslapping trades to come. But where IPO order book sizes are concerned, Hudco is best taken with a pinch of salt.