Gravy train slows down

SPECIAL FEATURE

Most listings of the March 2007 quarter have been mauled by the prevalent volatility and over-pricing. A report.

Volatile markets aren't the greatest of times for the retail investor. And when volatility breeds uncertainty on scrip movements even in well-established stocks, can investing in IPOs in such times really be a good idea?

"An IPO brings to focus a new company which investors for the most part know very little about," says an analyst from a domestic broking firm, "hence the pricing becomes the key." And yet, herein lies the problem.

As Amitabh Chakraborty, president (equities) Religare Securities puts it, "Ideally speaking, the pricing of an issue during volatile times should be lower than that in a trending market to provide for a risk discount, but that's not the case with a majority of the issues at present."

Of the 37 issues which debuted this year on the bourses, just over 27 per cent of them are currently trading above their issue price. At least 9 of these have collapsed over 45 per cent over their lifetime highs reached in the past three months. And short term gains haven't been great either. At least 62 per cent of the issues closed on the listing day at a discount to their issue price. 
 

DOES SIZE MATTER?
	Returns (%)	Size  (Rs crore)
Cairn India	-21	5260
Idea Cellular	27	2125
Power Finance	22	997
Indian Bank	-4.1	782
Firstsource	15	444

"There is little doubt that despite some good issues, pricing of IPOs this year has been on the higher side and in fact many listed at a discount to their issue price," says Manish Sonthalia, vice president, equity strategy, Motilal Oswal. And the problem with valuations doesn't really stop here.

"The problem is that a large number of small players entered the bourses during the bull run early in the year with aggressively priced issues," opines an analyst.

And sure enough, a perusal of the IPOs listed this year reveals that no less than 28 out of 37 issues had a issue size of less than Rs 200 crore, with the issue expenses in some cases being quite a substantial sum.

Compounding this problem is the fact that in some sectors, there exists an ambiguity in valuing the future stream of income linked to the core business.

Says Shashi Bhushan, head (equities), IL&FS Investsmart, "A classic example is real estate"�it is extremely difficult to calculate the value of potential revenue streams accruing from the core asset, which is the land bank."

And true enough, real estate stocks have been among this prominent list of scrips in unstable territory. Akruti Nirman, for example, which was subscribed over 80 times is trading at present at a 23.5 per cent discount to its issue price.

Similarly, the Sobha Developers IPO, which got listed in December 2006, has also found it tough in choppy waters collapsing nearly 47 per cent from its lifetime closing high of Rs 1104.5 on January 8 to a low of Rs 633 by early March.

"A similar problem may be faced by some media companies where the demand scenario is marked with uncertainty," says Religare's Chakraborty adding, "for example a company where a substantial stream of revenue is obtained from movies or related business, where the extent of prospective revenue is not clear, could require a cautious approach."

While media scrips in general haven't had the best of times in falling markets, the IPOs have been quite a mixed bag.

While two of the three TV broadcasting companies which debuted this year - Broadcast Initiatives and Raj Television "� are presently trading at a discount to their issue price, Global Broadcast News (which runs the CNN-IBN and IBN-7 news channels) has shown a whopping 115 per cent gain over its issue price of Rs 250 since its listing in February. 
 

GAINERS
Company	Issue Price (Rs)	Returns  (%)	Listing Gains  (%)
Pyramid Saimira	100	156	35
Global Broadcast	250	115	67
MindTree	425	94	41
Cambridge Tech	38	45	10.9
Tanla Solutions	265	28.5	43

"Though there were concerns over the losses it has been suffering at the operating level it appears that the strong CNN brand association, a well thought-out distribution strategy and the rapidly rising TRPs of its prime programmes are playing positively on investor sentiments," says an analyst. 
 

LOSERS
Company	Issue Price (Rs)	Returns  (%)	Listing Gains  (%)
Oriental Trimex	48	-52	-12.5
Broadcast Initiatives	120	-51	-2.5
C & C Constructions	291	-42	20
House of Pearl Fashions	550	-41	-9
Abhishek Mills	100	-38	-6
Note: Price as on 29 March, 2007

The star performers among the IPOs which listed in choppy waters this year have however been the IT pack. No less than five of the top ten gainers this year have been IT/ITES or related companies with a wide domain expertise ranging from niche telecom software to business processing outsourcing.

Tremendous investor interest was also evident in these companies as reflected in these issues being oversubscribed anywhere between 34-102 times. Mindtree Consulting has been an exceptional gainer"� trading at a whopping 94 per cent to its issue price after an impressive 41 per cent listing gain.

As Nitin Khandkar, senior vice president, research, Keynote Capital puts it, "Management pedigree, diversified portfolio across sectors and geographies as also an aggressive ramp-up of capabilities have made Mindtree defy the norm at a time when most IPOs are listing at a discount."

The first quarter of 2007 has also seen some behemoths hitting the street. But their performance has been quite varied. While eight of the ten largest IPOs are presently trading in positive territory, only 5 are up by over 20 per cent. And the biggest, Cairn India, has been one of the worst performers and trades at 21 per cent discount to its issue price. The issue, which mopped up over Rs 5,260 crore, was never really a darling of the bourses.

"Other than being aggressively priced, there has also been a lack of clarity on certain issues pertaining to evacuation which has affected sentiment," says Rohit Nagraj, research analyst, Angel Broking. And while Cairn faltered the other giant Idea Cellular fared much better.

With an issue size of Rs 2,125 crore invited considerable investor interest as testified by the issue being subscribed nearly 50 times. While the issue made decent listing gains at about 23 per cent, it has appreciated by about 27 per cent to its issue price since its listing.

The exuberance of IPOs hasn't really been great news for the common investor especially given that in already uncertain times a majority of the IPOs haven't really given much reason to cheer.

But at the same time as Keynote's Khandkar puts it, "There is nothing fundamentally wrong in investing in IPOs when markets are volatile," adding, "a good issue backed by a strong management focus and credible business model should enable the investor to make good money irrespective of the overall market conditions and short term corrections."