Are HNIs really making profit after imputing funding costs?
Over the last few weeks there has been a lot of euphoria over the way IPOs have got oversubscribed. Recent IPOs like Ujjivan and Thyrocare were substantially oversubscribed. Within the various categories, the HNI portion (Greater than 2 lakhs) got the maximum oversubscription. That is hardly surprising because that is the segment that heavily relies on financing to apply for IPOs. But the key question is whether the HNI actually makes money after considering the funding costs.
The case of Thyrocare IPO…
The IPO of Thyrocare that listed this week started off at a hefty premium of 49% to the issue price. It may look extremely impressive but the sheen would largely go away if you consider that the funding cost for HNIs adds up to quite a bit. Against the discovered price of Rs.446 in the IPO, Thyrocare listed at Rs.662. Now, let us consider the HNI portion and evaluate if the HNI would have made money net of funding costs. The HNI portion of Thyrocare IPO was oversubscribed 225 times. Since the allotment in the HNI portion is on a proportionate basis, an HNI who applied for 22500 shares would have been allotted 100 shares. To apply for 22500 shares he would have sought funding to the tune of Rs.1 crore (22,500 X 446). Assuming interest at 9%, the interest for the 7 day period works out to Rs.17500 (1 crore X 9% X 7 days). Thus on an allotment of 100 shares, this would work out to a funding cost of Rs.175 per share. Therefore the HNI’s total cost of 1 share will be Rs.621 (446+175). At the listing price of Rs.662, the net return would have been 6.6% after considering funding costs. It is therefore hardly surprising that the stock has corrected sharply after that.
The case of Ujjivan IPO…
The Ujjivan IPO was oversubscribed 135 times in the HNI portion. Therefore an HNI who had applied for 13500 shares would have got an allotment of 100 shares. On 13500 shares, his interest cost will work out to Rs.4961 (13500 X 210 X 9% x 7 days). That approximately works out to a funding cost of Rs.50 per share. Thus his total cost per share works out to Rs.260 (210 + 50). Remember, that Ujjivan listed a day after Thyrocare at a premium of 10%. If you are impressed by the premium listing, then think again. At a listing price of Rs.230, HNIs would have made a huge loss as their cost of acquisition was Rs.260. That is why cost of funding becomes extremely critical while calculating post-listing performance.
IPO funding can be a double-edged sword. Oversubscriptions makes it more lucrative to fund IPOs, but HNIs who adopt the funding route will increasingly find it difficult to make money. Premium listing alone is not enough. For issues that are heavily oversubscribed, the overall funding cost matters a lot.