Shares in Garuda Indonesia, the nation's flag carrier, dropped 17 percent on their trading debut on Friday as buyers were scared off by a high valuation, a sign investors have turned cautious on Indonesian markets.
They were put off by pricing that valued Garuda far higher than its regional peers after the government intervened to push the initial offer range higher, at a time when growing inflation and oil prices cast doubt on the airline sector.
The IPO is the first of a slew of state enterprises due for flotation this year and will be closely watched by Vietnam Airlines and Indonesia's Air Asia which are both planning to test markets this year.
Garuda's weak start, the only fall in a major Indonesian listing in the past year, comes as the country's once buoyant stock market has slid in 2011.
"It's unfortunate that Garuda's long-awaited debut had to come at such a volatile time but such are the vagaries of the equity market. 2010 was a much better year for airlines," said Shukor Yusof, an aviation analyst at Standard & Poor's.
Garuda raised more than IDR4.75 trillion rupiah (USD$532 million), including the sale to the public of a 10.6 percent stake by state lender Bank Mandiri, but less than an initial USD$1.1 billion targeted in the first IPO by an Indonesian airline.
The stock closed at 620 rupiah, after touching a low of 580 rupiah and well below the IPO price of 750 rupiah. The broader Jakarta market was up 0.5 percent, though it has fallen about 8 percent this year.
"It will be tough for the share price to climb above 750 rupiah in the near to mid term, especially with such ferocious competition in the form of Lion Air and other low-cost carriers, as well as strengthening jet fuel prices," Yusof said.
Investors have sold Indonesian stocks this year on worries over inflation and to take profits on a 46 percent rally last year. Still, longer-term sentiment remains positive as Southeast Asia's biggest economy is growing strongly and hopes to get an investment-grade sovereign-credit rating in the next year.
"The market is weak due to inflation concerns," said Emirsyah Satar, Garuda's president director, at a press conference. "But I'm sure in the next six months the stock price will go up more than the IPO price."
Satar, a former banker at Bank Danamon, is widely credited with turning around the airline, after significant debt problems and a three-year ban on flying to Europe, due to safety concerns, that was only lifted last year.
But investors are wary of state interference and poor corporate governance in a country where some of the biggest enterprises are owned by the government, giving them an advantage over private firms.
Garuda's IPO involved the highest levels of power. Underwriters initially set a range of 560-850 rupiah, but after a meeting of privatization and airline officials with President Susilo Bambang Yudhoyono and his ministerial advisers, the government set a higher range of 750-1,100 rupiah.
The government move to push its pricing higher came after it was accused by some critics of selling off assets cheaply last year when the IPO for Krakatau Steel was heavily oversubscribed after being priced at the bottom of the range.
Garuda said investors only took up 3.2 billion shares from the 6.3 billion offered so that underwriters Bahana Securities, Mandiri Sekuritas and Danareska Securities had to take up the remainder, or more than USD$253 million.
"The privatization of Garuda involves the reputation of Garuda and most importantly the Republic of Indonesia. Unfortunately, it seems that the top decision maker was not too sensitive about the stakes at risk," said Lin Che Wei, analyst at independent research house IRAI in Jakarta.
"The failure of Garuda IPO's might bring a huge risk to the balance sheets of these state-owned enterprise securities firms."
Garuda's IPO is also likely to be watched closely by other Asian airlines that may be looking to list this year.
Global airline margins remain low as a recovery from the financial crisis is faltering. Europe's largest airline by revenue, Air France-KLM, issued a profit warning on Thursday, sending its shares down 10 percent.
"We expect downward pressure in the next six months as huge capacity is coming in the region and China is slowing down," said Jay JH Ryu, head of regional transport at Mirae Asset Securities.
"Airlines are trying to impose more fuel surcharges to customers and it may depress demand further," he added.
Philippine budget airline Cebu Air, which jumped almost 7 percent in its market debut last October, has seen its shares fall about 30 percent since then. Cebu raised USD$611 million in its IPO.