Mutual Funds Bring Ola Electric's IPO Price Back To Reality

The rising heft of the domestic mutual funds is now bringing some sanity to valuations in the initial public offer size above Rs 3,500 crore. And that is because mutual funds have become a prominent liquidity pool to raise capital in India.

Bankers are struggling to push high valuation in large IPOs as mutual funds are pushing back on price and valuations.

India's top mutual funds have taken the role of price setters in large IPOs, and the king (issuer) and their men (merchant bankers) are helpless. Large IPOs cannot get through without mutual funds and the domestic investor will not invest without profit on the table.

This was not the case a few years back when the discretionary allotment process to the qualified institutional buyers used to crowd out mutual funds that did not stand a chance to get any allotment until the market regulator stepped in to ensure mutual funds are essential part of the anchor book and the net IPO book.

To start with, one-third of the anchor portion, which is normally 60% of the QIB portion, is reserved for mutual funds.

For profitable companies, 50% of the IPO is reserved for the QIBs and 75% in case the company does not have a profitable track record.

Which means at least 11% in the IPOs of profitable issuers and 16.5% in the IPOs of non-profitable issuers have to be allocated to domestic mutual funds. That makes the top mutual funds — HDFC MF, SBI MF, Nippon MF, ICICI Prudential MF and Axis MF —price setters in large IPOs.

This is more evident off late in the large issues of new-age loss-making companies where they are unable to push price and valuation despite having a round by existing investors at a high valuation just ahead of filing of the draft red herring prospectus.

The down round the IPO valuation is here to stay and mutual funds are now playing a pivotal role in ensuring that company valuations are grounded, and they leave gains on the table post-IPO. There is nothing the private equity and the venture capitalist can do except reduce the size of the IPO and offer for sale, and wait for the secondary-market valuation to rise before selling.

A recent example of this could be seen in the IPO of Ola Electric Mobility Ltd., where despite the company raising around Rs 1,100 crore in December 2023 at $5.7-billion valuation, it was forced to price nearly 30% lower in the IPO at $4 billion.

Mutual Funds were sitting on cash pile of over Rs 1.2 lakh crore at the end of June. They have witnessed 40 straight months of inflows till June 2024. Equity inflows increased 17% to Rs 40,608.2 crore in June against Rs 34,697 crore in May, according to data released by the Association of Mutual Funds in India.

A bulk of the cash pool is with the top five mutual funds. Top five mutual funds held over Rs 68,000 crore in cash — nearly 60% of the total cash holding of MF industry. These inflows are backed by systematic-investment-plan investments, which reached a new peak with Rs 21,262-crore gross investment in the month of June, as against a contribution of Rs 14,748.7 crore in the same month last year. The SIPs have been on a continuous rise since April 2021 when net investments stood at Rs 8,596.3 crore, according to the AMFI data.

In the month of June, mutual funds net bought Rs 28,103 crore and in July so far, they have been net sellers to the tune of Rs 1,538.6 crore.

Between mutual funds and the retail portion, 26–46% of the issue is now dependent on the retail investors and driving a hard bargain is not something a merchant banker would have ever imagined they would have to face.

At this juncture, for the banker selling to the foreign investor would seem far easier than selling to the mutual fund, which is chasing returns fuelled by retail money.

More power to retail money!