Follow the leader?

SMARTSHARE

The volatility of secondary markets is cited as good reason for lay investors to steer clear. But lay investors do subscribe to IPOs. This is odd because the primary market is even more unpredictable than the secondary.

IPO information can be less than reliable. Promoters have been known to go public with glowing financials and plans and then pocket the proceeds and disappear. Allotment itself is a lottery.

When there is reliable information (as in say, NTPC, IDFC and Tata Consultancy), the IPO is richly-priced, reducing chances of windfalls.

Net-net, an IPO carries greater risks. Of course, IPO multi-baggers do happen but it's a very hit-and-miss process.

I examined a fascinating red herring prospectus some five months ago. It was a new company, in a new business, with amazing margins and growth.

There were also some unusual risks listed. To be frank, I couldn't make a rational decision and just tossed a coin. It came down on the side of caution.

The IPO has since morphed into a listed company, which has delivered fantastic growth while maintaining great margins. The issue price was Rs 72 and in late March, the stock hit Rs 90 on listing. It traded at Rs 200 last week. Franklin Templeton and Fidelity own the stock; both FIIs are notably long-term players. The company is a buzzword on net forums and TV.

Gateway Distriparks Limited (GDL) went public in March with an IPO offering 21 million shares including 4.7 million sold by IDFC. GDL is in logistics; it processes containerised cargo at ports and in its container depot at Delhi.

In 2004-05, GDL declared an (unaudited) operational income of Rs 96 crore versus Rs 59 crore in 2003-04. It logged Rs 52 crore OP in 2004-05 (Rs 28 crore in 2003-04) at a margin of 54 per cent. The net profit was Rs 34 crore (Rs 19 crore 2003-04).

In Q1, 2005-06, q-o-q growth zoomed with operational income of Rs 33.8 crore (Rs 17.75 in Q1, 2004-05) and Rs 21.7 crore in OP (Rs 8.8 crore in 2003-04). Net rose to Rs 17 crore versus Rs 5.6 crore. No wonder the stock's hot.

What about risks? The normal business risks are listed in the prospectus, of course. The margins on container imports are higher than the margins on exports, there are cyclical trade factors that affect business, currency risks, rising transport costs, potential regulatory risks etc.

GDL also listed a large number of pending criminal cases and litigations. The CBI has filed criminal charges (in separate cases) against the managing director, P K Gupta and against an independent director, M Pinto.

There are charges under section 420 IPC outstanding against another promoter-director, Govind Pillai. Sebi has fined one of the promoter companies, a Mauritius-based entity named Thakral Investment Holdings for violating the takeover code.

Despite the impressive profit margins, cash flow was negative in 2003-04. Many of the group companies (all unlisted), have registered losses in the recent past. There is a sizeable contingent liability of Rs 37.8 crore.

All this is public information and presumably it has been absorbed and factored into investment decisions by the FIIs mentioned above. Lay investors without the kind of access that institutions possess might prefer to wait a few more quarters before playing follow the leader.