With over half the IPOs that hit the market in the last one year trading below their offer price, investors must exercise caution.
With the sentiment buoyant and the popular indices closing in on their all-time highs, it’s hardly a surprise to see several companies trying to tap the primary market for funds. While 40 companies raised a total of about Rs 35,500 crore in the January-August period, 13 Initial Public Offers (IPOs) hit the market in September alone — the highest for a month this year. The number of IPOs in the market this year is double that seen last year.
And, this could just be the tip of the iceberg. “There is a large pipeline of IPOs looking to hit the market. Of the 100 companies which have already filed the prospectus, only 15-16 have hit the market,” says Prithvi Haldea, chairman and managing director of Prime Database.
| WINNERS AND LOSERS | ||
| Company | CMP (Rs) | % chg |
| Jubilant FoodWorks | 475 | 227.8 |
| Aqua Logistics | 658 | 198.9 |
| Midfield Industries | 397 | 198.2 |
| ARSS Infrastructure | 1,247 | 177.1 |
| Thangamayil Jewellery | 162 | 115.7 |
| Intrasoft Technologies | 100 | -31.3 |
| Shree Ganesh Jwlry. | 172 | -33.8 |
| Tarapur Transformers | 35 | -52.7 |
| Aster Silicates | 54 | -54.0 |
| Emmbi Polyarns | 20 | -55.6 |
| Cumulative funds raised by 36 companies in 2010 is Rs 12,961.21 crore Current market price (CMP) is as on 29th Sept, 2010 % Change is over issue price, Source: BS Research | ||
Given the trend, don’t be surprised if the cumulative amount raised through IPOs in the calendar year crosses the peak of Rs 45,142 crore seen in 2007. In this backdrop and the not-so-exciting performance of the IPOs that hit the market in the last one year, it is essential for investors to exercise caution.
Time to be cautious
“Today, with the index having touched 20,000, all types of issues are hitting the markets. In this crowd of issues, the good and the bad are getting mixed and it is becoming difficult to choose. Yes, some companies are trying to take advantage of the situation and may succeed in raising the required money as well. Hence, I believe it is time to be cautious,” says Arun Kejriwal of Kejriwal Research and Investment.
There is ample liquidity in the market and the sentiment is good, which is also a reason that analysts believe has helped the companies tap the market. “Investors need to be extremely careful, given that the markets are not cheap. Rising markets are generally the perfect time for companies, especially those with poor fundamentals, to hit the market. Also, they tend to seek very high valuations, which in turn does not leave anything for the investors,” says Chetan Parikh, director, Jeetay Investments.
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IPO pricing has been the most worrying factor. As per a study by CARE Research on price performance, of the 116 IPOs that came between August 2007 and August 2010, a whopping 62 per cent are currently trading below the lower end of the price band. As per data compiled by Business Standard too, of the 36 IPOs that got listed in 2010, 18 are quoting less than their offer price. The trend is undoubtedly unhealthy and partly indicates the greed of the interested parties.
What you should do
While the companies and promoters will try to seek the maximum price possible so that they can enhance their returns with minimum dilution, retail investors need to ensure they get their money’s worth.
Investing in an IPO is almost similar to investing in a listed company. The key difference is that a listed company is relatively more researched. Hence, while investing in an IPO, investors need to analyse equally carefully the company’s fundamentals, its position in the industry, entry barriers in its business and key financial ratios such as the return on the capital employed (which reflects how much a company is earning for every rupee employed), the debt equity, the working capital, the cash flow from operations and the profit margins, among others. While the offer document provides most of these details, the IPO grading is also a good indicator.
Once you are convinced about the business and growth prospects of the company, valuation is the next key factor to look at. Ensure that the valuation is reasonable, at least in terms of the company’s closest peer, and broadly in line with the industry. As a word of caution, Parikh says, “Companies might sometimes argue that the valuations are good based on the peer comparison. But, one should not solely buy that argument, especially given that the peer companies themselves trade at high valuations in a rising market.”
What you should not do
In a marketplace where various entities have different interests, some even try to lure investors to subscribe to IPOs by referring to things like ‘grey-market premiums’, which can in no way be trusted. Experts like Parikh say it’s a big mistake to take that as a reference point as anybody can rig the prices and it can all turn out to have been managed. Last, but not the least: Don’t invest in an IPO for listing gains. Invest only if you feel the company’s business is competitive and can deliver a healthy performance in the coming years, which is what will ultimately determine the returns you earn.