Sasken's stag party

SMARTSHARE

The success of the recent Sasken Communication Technologies IPO was expected. It was also assumed that the stock would list at a massive premium to the issue price. This had little to do with the business itself.

Investor appetite for IPOs obviously remains as strong as ever. It was no surprise that the Bangalore-based software company raised funds at the top end of its IPO band, garnering Rs 130 crore at Rs 260 per share after offering a band of Rs 230-260.

Most Indian investors, including major FIs, now treat IPOs like high-yield, quasi-debt instruments with an element of gambler's luck thrown in. The cash is blocked for a known period with a "money-back guarantee".

If you get allotment (that's where the luck comes in), there may be an instantaneous gain upon listing and you may as well cash out. If there's been an oversubscription to an IPO, it can more or less be guaranteed that there will be some price-appreciation on listing.

If you sell high within the first session, the absolute appreciation can be multiplied roughly by a factor of 13-14 to calculate a nice annualised "yield".

This perception of IPOs as a safe, quasi-debt play sets up a feedback loop. Everybody subscribes to an IPO. That ensures over-subscription, which ensures high listing prices, etc,etc.

This phenomenon of spurts on listing has occurred earlier with stocks like Deccan Chronicle, NDTV and IDFC. In Sasken's case, the stock listed at Rs 460 "" a massive premium of Rs 200 over the IPO price.

At the listing price, the company, which is (entirely incidentally) in the business of making software for the wireless telephony and broadband markets, is valued at something like 32 times its trailing 2004-05 earnings.

That implies it's in the same valuation league as Infosys. In comparison to Flextronics, which is a closer fit, that's very rich value indeed. Flextronics, occupies almost exactly the same sub-segment of industry space and has better profitability and a less concentrated client-list than Sasken. It trades at between 20-25 trailing PE.

Sasken has already eased down slightly, to a current price of about 440. The first week's fluctuations underline another technical point.

There is no restriction in terms of price bands and freezes on the first session of listing and immediately after, the stock is allowed a generous band of 20 per cent.

This gives the grey market specialists plenty of latitude to have their fun before the NSE-BSE committees come to a decision about what price-band the stock "deserves".

If, in fact, it's an F&O candidate, there's no problem since those stocks have no circuits. But in other circumstances, there can be a sudden freeze on volatility.

This actually makes the game riskier for a long-term IPO investor, who is not in the "stag" game of looking for a fast, safe yield.

Suppose a stock lists at a big premium like Sasken (76 per cent) and drops sharply through the next few sessions losing, say, 40 per cent. Then, the stock is placed in the 5 per cent band. Even a renewed uptrend will take several weeks to push it back close to the listing price.

So, why would you hold on for long-term valuations? You may as well enjoy the stag party even though this turns conventional investment logic on its head.