<b>B G Shirsat:</b> How to lose money in IPOs

Market
 price
(17/03)

% chg

Financials 2004-05

Equity*

NP cr

EPS

Sree Sakthi Paper Mills3015.40-48.6716.441.090.66 Compulink System6032.40-46.0010.373.613.48 Bannari Amman Spg Mills135101.55-24.7815.7511.537.32 Gitanjali Gems195151.50-22.3159.008.761.48 Jagran Prakashan320258.75-19.1450.201.530.30 Sakuma Exports5040.90-18.2016.181.360.84 H T Media530453.05-14.5246.8427.345.84 * post IPO  So, why did these IPOs flop on the bourses when the secondary market has been logging gains every day? A close look will reveal that these IPOs were priced at very high price to earnings (P/Es) ratios - at least on the basis of their earnings in the financial year 2004-05.  When the secondary market is currently trading at a P/E of around 17 times to their trailing twelve months earnings (December 2005), 12 out of the 18 IPOs were issued at a P/E of over 20 times. The other eight, too, got higher premium to their peers in the secondary markets - at least on the basis of P/E.  Sree Sakthi Paper Mills eroded investors' wealth by almost 50% as the stock is currently traded at Rs 15.40 when compared with its issue price of Rs 30. The track record of the company prior to the public issue was none too impressive. It earned a net profit of Rs 1.09 crore in 2004-05, and an earnings per share (EPS) of Rs 0.66 on the expanded equity base of Rs 16.44 crore. Which means the stock was offered in the IPO at a P/E of 45.25!  Gitanjali Gems, which was listed last week, flopped on Day 1. As against the issue price of Rs 195, Gitanjali closed at Rs 167.15 on the day of listing and is currently trading at Rs 151.50.  The company had earned a net profit of Rs 8.76 crore in 2004-05, which gives an EPS of Rs 1.48 on the expanded equity of Rs 59 crore. Which means that IPO price of Rs 195 was at a P/E of over 131!!! Overpriced, did anyone say?  The bottomline - LOOK CAREFULLY AT THE FUNDAMENTALS BEFORE INVESTING IN HIGH PRICED IPOs.