Parent companies coming up with IPOs of subsidiaries; should you buy?

Indian primary markets are on a high currently with a number of issues lined up to launch their IPO in the upcoming months. Following the historic success of Bajaj Housing Finance IPO, a number of listed companies are also intending to list their subsidiaries and ride the capital rush in the Indian equity space.

Beside the euphoria for the new age companies, a number of companies from green energy, electric vehicle, diversified financials services sectors are lined up to make their debut at the Dalal Street. Some of these listing bound companies have already filed their DRHPs, while others have received the preliminary approval from the board to launch their stake sales. 

Interestingly, there is a strong possibility that the listing-bound subsidiaries may have quotas for the shareholders of the parent company, enabling them to make dual applications in the IPO. This also triggers investors' interest in the parent company as investors keenly track them as they gear up for the IPO of their respective subsidiaries. 

Market participants believe that it is a win-win situation for both investors and companies. They believe that a vibrant primary market allows investors to participate in the growth and success journey of the company. Also, the company is able to raise capital in a structured and easy way, with less cost of funds being involved.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said that a number of companies are aiming to ride the exuberance in the primary markets, which has been seen in the recent times. Also, they want to raise capital from the equity markets, which also gives investors an option to participate in the journey of select new age businesses. 

Raising debt and servicing it may become challenging for the companies, said Trivesh D, COO at Tradejini. "Also, with bullish stock market sentiment, there is a positive environment for the IPO market as well and a number of companies eye to cash in the opportunity for raising funds and go ahead with the planned expansion path," he said. 

Talking of the companies, NTPC has already filed DRHP for a Rs 10,000 crore IPO of NTPC Green, while HDFC Bank has approved the primary stake sale of HDB Financial Services last week. Besides them Canara Bank's Canara Robeco AMC, Hero MotoCorp's Hero Fincorp and Bank of Baroda's India First Life Insurance are also in the pipeline for their IPOs.

ONGC's ONGC Green Energy, Reliance Industries' Reliance Jio and Reliance Retail, Tata Motors' Tata Passenger Electric Mobility Hero MotoCorp's Ather Energy, Manappuram Finance's Asirvad Micro Finance and Muthoot Finance's Belstar Microfinance are other companies which are reported to have queued up for their stock market debut. 

One can not just assume that all listing bound subsidiaries will have reservation for the shareholders of the parent company and simply lap them up. If there is a shareholder quota announced in the DRHP, having a single share of the parent company allows investors to apply in shareholder's category. 

Market experts suggest that buying the parent company's stock for the benefits of double application might be a prudent approach but one should also look at the fundamentals of the parent to understand the business of the former one. Understanding the business of listing-bound players is also important besides simply riding the euphoria.

"Investors should look at the pedigree of the parent along with the business model and fundamentals of the subsidiary company which is likely to get listed. Raising capital from Indian equity markets allows investors to create long term wealth as the Indian economy is set for strong growth in the coming year," Bathini from Wealthmills said. 

Trivesh D from Tradejini said that it’s a win-win for both companies and investors. These companies are of good pedigree — well-established, reputable names. The risks are relatively low, and the rewards look promising, making it a prime time for investors to capitalize on the ongoing IPO momentum, he suggested.