The subscription from the retail category for three recent initial public offering (IPOs) in December 2010 makes interesting reading.
- The MOIL IPO, which had a quota of 11,524,800 shares and closed on December 1, was overwhelmingly over-subscribed 32.86 times.
- The A2Z IPO, which had a quota of 7,465,918 shares and closed on December 10, was under-subscribed 0.33 times.
- The Punjab & Sind Bank IPO, which had a quota of 13,300,000 shares and closed on December 16, was overwhelmingly over-subscribed 44.45 times.
Both in terms of number of shares reserved for the retail investors category and the response received, the Punjab & Sind Bank IPO was the biggest and the A2Z the smallest among these three IPOs.
A2Z is a private sector corporation in which Rakesh Jhunjhunwala, a stock market wizard touted as India’s Warren Buffett, has substantial investments. “The promoter Amit Mittal and the business model inspired me,” he said some time ago. Between March 31, 2007 and March 31, 2010, A2Z’s performance has been outstanding. Total income rose by 6.76 times, from Rs 181.29 crore to Rs 1225.30 crore; and its profit after tax rose even faster by 8.84 times, from Rs 11.15 crore to Rs 98.62 crore.
At the upper price band of Rs 410, the original investment of Rs 20 crore at Rs 10 per share made by Jhunjhunwala was expected to gallop in value to over Rs 800 crore. But when the stock listed on December 23, the highest price it could command, that too for a brief while, was Rs 390 and it nosedived to Rs 325 a couple of hours later. “A2Z Maintenance — heading below Rs 200 level soon, exit the stock immediately, the clout of ‘RJ’ is losing (in the) stock market,” advised a panic-stricken boarder on the Moneycontrol.com message board.
What could have caused A2Z IPO’s lacklustre performance? Another significant point worth mentioning is, that the A2Z IPO was not being crowded out by other contenders. In fact, announced IPOs like One97 Communications and L7T Finance had actually been postponed.
Now take the case of MOIL and Punjab & Sind Bank. Both are public sector companies. MOIL touched Rs 591.05 when listed on December 15. At the time of writing, its price is hovering at Rs 460 to Rs 465. Against the IPO price of Rs 356.25 (after a 5 per cent discount), it is yielding a profit of around 24 per cent. The investment in the MOIL IPO has, therefore, been considered worthwhile.
The MOIL IPO, which planned to rake in Rs 1,260 crore, at its upper price of Rs 375, was the largest of the three. The A2Z issue at the upper price limit of Rs 410, which expected to rake in Rs 675 crore, was the second largest, while the Punjab & Sind Bank issue with Rs 480 crore as its target at the upper price band of Rs 120 was the smallest.
| SERIOUS ISSUE | ||||
| NON-INSTITUTIONAL INVESTORS | MOIL | A2Z | Punjab & Sind Bank | |
| Shares reserved (number) | 4,939,200 | 3,199,679 | 5,700,000 | |
| DAY 1 | (Times subscribed) | 0.88 | 4.08 | 0.18 |
| DAY 2 | 2.4 | 4.25 | 6.9 | |
| DAY 3 | 8.77 | 3.12 | 22.91 | |
| DAY 4 | 143.3 | - | ||
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First, while rating agency CARE gave MOIL a rating of five, which indicates the highest “strong fundamentals”, A2Z and Punjab & Sind Bank got a rating of four, which means “above average fundamentals”. For those who go by ratings, the A2Z issue, which was graded four but priced at Rs 410 per share, was over-priced compared to the MOIL IPO, which was graded five but priced lower at Rs 375 (Rs 356.25 after a 5 per cent discount for retail investors). The Punjab & Sind Bank issue, which was priced at Rs 120 at the upper limit (Rs 114 after a 5 per cent retail discount) and enjoyed the same rating as A2Z, was 3.6 times cheaper.
Second, in terms of net profit after tax as a percentage of its total income, as on March 31, 2010, MOIL scored the highest with 42.87 per cent, Punjab & Sind Bank the second with 11.71 per cent, and A2Z the third with 8.04 per cent.
Third, the A2Z issue did not also spell out with credible focus, how it proposed to utilise the IPO proceeds. It talked about investing to set up three bagasse-based power cogeneration projects of 15 Mw each in Punjab, five biomass-based power generation projects of 15 Mw each in Rajasthan; investing in subsidiaries; repaying a loan granted by L&T Infrastructure Finance Company Limited; meeting working capital requirements; and using the proceeds for general corporate purposes. Too general and too thin a spread. The group companies or subsidiaries are A2Z Maintenance & Engineering Services Limited, A2Z Infraservices Limited, A2Z Infrastructure Limited, A2Z Powercom Limited and A2Z Powertech Limited.
In contrast, both MOIL and Punjab & Sind Bank were more specific about how they proposed to use the IPO proceeds. MOIL said it would carry out a disinvestment of 33,600,000 equity shares by the selling shareholders (Government of India) and use the remaining funds to benefit from listing equity shares on stock exchanges. Punjab & Sind Bank said it would augment its capital base to meet future capital requirements and deploy funds for general corporate purposes.
Over-pricing has been a major problem affecting investment in the retail category. On an average, in recent times, six out of 10 IPOs, mostly from private sector entities, have turned out to be value destroyers, even though the Sensex touched and even briefly crossed the magic 21,000 mark. The one conclusion that a capital market observer could draw is: retail investors are becoming more mature and more cautious in evaluating IPOs. This is so because if there is nothing or very little left on the table for a retail investor, he would like to look for better investment alternatives. As he should.
One other glaring aspect of the A2Z experience is the possible role of operators in the garb of high networth individuals or non-institutional investors, who manipulate the market. As the table indicates, commitment for 1.13 times or as many as 3,615,637 shares (of the quantity reserved in this category) vanished into thin air on Day 3 when the offer closed. Obviously, the subscription of over four times received on Day 1 and additional 0.17 times received on Day 2 were designed to induce retail investors to invest. That did not happen.
The Securities and Exchange Board of India should order an investigation into this aspect and act against those concerned.
The largest and the best IPO in recent times, however, is Coal India, which, at an IPO price of Rs 232.75 (after discount), touched Rs 357.60 when it listed on November 4 and is quoting at Rs 320.90, fetching a profit of 31 per cent.