 "Risky to bet on IPOs in rising markets")
Investors in initial public offers (IPOs) would do well to re-think their strategy after seeing these numbers: Between 2005 and January 2008, when the Bombay Stock Exchange Sensitive Index, or Sensex, tripled from 6,000 points to 21,000 points, 224 IPOs hit the market.
Almost a decade later, 133 or almost 60 per cent of them are trading below their issue price. Prices of only 68-odd stocks have more than doubled and given significant returns to investors. Worse still, 65 stocks, or 30 per cent are down 80 per cent or more. These include names like ABG Shipyard, GMR Infrastructure, Punj Lloyd, Suzlon Energy, Lanco Infratech and others. Many, in fact, are not even traded. Obviously, it's not all hunky-dory for IPO investors most of the times.
"Whenever there's buoyancy in the market, investors' risk appetite increases. Merchant bankers make use of the positive sentiment to help companies raise money, often by pricing the IPO aggressively," says I V Subramaniam, managing director and chief investment officer (CIO), Quantum Advisors.
In the first half of the current financial year, companies have raised Rs 17,283 crore through IPOs. This is the highest amount raised in the past nine years. Going forward, the pipeline is quite strong. Sixteen companies plan to raise Rs 5,745 crore and another five are awaiting the regulator's nod to raise Rs 6,810 crore.
IPOs are riskier
Evaluating companies going for IPOs is usually tougher than taking an investment call in an already-listed entity, according to Prateek Agrawal, business head and CIO at ASK Investment Managers. While there are disclosures in the red herring prospectus, price discovery is a tricky thing. A listed company has already gone through the process of price discovery, it's well-tracked by analysts, and a lot of information is available in the public domain. It's also easier to take a call on a listed company's management quality based on how it has steered it in different business cycles.
There are also times when a company offering its shares does not have a comparable listed business, which can make it more difficult to take an investment call. Between 2005 and 2008, real estate companies came to the market to raise money for the first time. The number of companies that destroyed investors' wealth is also the highest in this sector. Parsvnath Developers, for example, is trading 91 per cent below its issue price and the country's biggest realty firm DLF is down 70 per cent. That's why investors should only opt for businesses they understand. The same applies to insurance companies that are the flavour of the market at present. Many IPOs from this sector are expected to hit the market soon.
Listing gains are not guaranteed
The IPO market is full of minefields. If you are looking to make a quick buck by selling on listing day or within the next few days, there are chances that you could get caught on a wrong day, like the ICICI Prudential Life Insurance offer was on the previous Thursday. With the Sensex crashing by almost 500 points on the day due to India's surgical attacks on Pakistan, the insurer's stock fell 10.17 per cent on listing. Investors who might have borrowed to invest and make quick profits are caught in a trap now. More worrisome is the fact that if tensions escalate, the stock may suffer even more. Such event-based risks can hit even the best company's stock prices in the short term.
"The strategy of investing for listing gains may work for some but investors need to be selective about the companies. They also need to realise that it doesn't work every time - of five issues that an individual invests in, maybe two IPOs may offer gains on listing day while three may not. Other than evaluating the company based on its financials, consider the reason for the IPO as well. Is the company raising money to reduce debt, expand business or capacities, for inorganic expansion, or just to give an exit to existing shareholders? It's not that one of these factors should be looked at more positively than the others. But, if a company is raising money for capacity expansion, look at its capability to do so. In the 2005-2008 rally, a company came with an aggressively-priced IPO, subscribed multiple times. It raised money for expansion without a single project. The result: The stock went into free-fall after listing.
There is nothing necessarily wrong with IPOs where promoters are diluting their stake. But if the management changes after the issue, you should be cautious. If a company wants to reduce debt using IPO proceeds, it can work in investors' favour. As the debt-to-equity ratio improves, so does valuation.
Don't rush for an IPO just because you see well-known institutions subscribing as anchor investors. "An investor can never know their investment horizon and reasons for subscription. Moreover, everyone makes mistakes, even well-informed institutions. One should not invest based on their views alone," says Agrawal.
