The Indian initial public offering (IPO) market is under the microscope again with the recent re-pricing of the South-based real estate major Puravankara Projects IPO. The initial price band of Rs 500-525 had to be scaled down to a much lesser range of Rs 400-450. The re-pricing has pointed towards three important facts.
First, the most obvious one, the primary market is not a separate insulated world but bears a concomitant impact of the volatilities of the secondary market. Second, being the exorbitant premiums at which IPOs are getting listed and their subsequent downfall. Overall, the listing gains exhibited a year ago have clearly flattened. From the high of 50% gains in 2005, the average listing gains have come down to 20% levels. And this average includes a wide range. Of the 26 issues listed since May 2007, around 10 are now in the negative zone.
Lower listing gains can be attributed to higher and more aggressive pricing made in the wake of the secondary market euphoria. And then there is the third factor, the intensive participation of qualified institutional buyers (QIBs). The QIBs have been active in the IPO market and have been cornering off large chunks, especially in real estate issues.
With sub-prime scares threatening to pull the market further, analysts reckon that QIB participation in the IPO market will be lower. The first cut reaction is to pack your bags and leave. ?This would be an over-reaction. The IPO market has always provided me with returns. The case is no different now,? says Dipti Singh, a senior management executive and an avid IPO investor.
The statement is not without reason. IPO investing has provided with returns as well. Companies like Everonn Systems and Vishal Retail have more than doubled in recent times. Clearly, the IPO market has a lot of value to offer. It?s just not a free-for-all anymore. An analysis carried out by FE Investor on the IPOs that have hit the market and IPOs that are in the pipeline suggests that a little prudence could help your gains climb.
FE Investor culled out 10 unique IPO issues, with varied performance, randomly. The idea was to check if an IPO investing philosophy could be universally applied across the board. For testing the validity, a set of 59 companies, which were listed between January to September 2006, were chosen. They were companies that have not hogged the media limelight.
Some of the lessons gleaned from this study and conversations with leading investment experts and merchant bankers are:
Lesson 1: Know the game rules
One of the biggest mistakes that investors make while entering into the IPO market, reckon experts, is that they don?t know what they want. ?If you know where you want to go, you will land up there,? says Singh. There are gains to be made from a lot many places. First, the listing gains, then there are gains that come from holding the scrip, based on a desired time frame.
Listing gains can be a tricky game to play, as it is also driven by the sentiment factor. Outrageously horrible issues list at handsome gains in euphoric times. And in bearish phases sound issues are listed at a discount.
Then there are unscrupulous promoters who are involved in price rigging as there is no circuit breaker for IPO listing. Isolating them can be a challenge, something that the investor community can stay away from.
Also, playing the listing gains game requires you to have a greater focus and discipline as well. ?Stocks that rally on listings also have a tendency to retreat with speed on the very same day,? says a broker. The case in point is the prestigious DLF issue which was priced at Rs 525, immediately gained on listing and rose to above Rs 700 levels. The very same day it crashed back to record a small gain over the listing price. It?s a high risk game, the broker avers. ?It becomes difficult for even us to know when a price reversal will come through,? he adds.
A study reveals that a majority of companies with high listing gains often see the share price retreat back to the listing price within a month. So if you are playing the listing gains game, the strategy should be to cash out quickly. The other game is long-term investing. And this requires patience and diligence normally associated with investing.
Lesson 2: Know the player
The diligence obviously includes not getting carried away by market-led euphoria. Often wealth managers and merchant bankers would seek your time to present the case of a stellar IPO and speak of grand gains. ?Strong companies do not require a lot of tom tomming, their performance speaks volumes,? says a wealth manager. The more the noise the more I am wary, he adds.
S Ramesh, COO, Kotak Investment Banking, adds, ?Investor in the euphoria period tend to forget the basics. They need to gauge and consider the sector, peers and objectives of the company entering the market.?
Here the Red Herring prospectus is a great source of information. This document is available at the Sebi website and can be downloaded with ease. All matters regarding the company, its promoters and their dealings are listed in the document. The regulator has made sure that all relevant information required to take a wise investment decision is included in this document.
A critical factor here to remember is that the promoter is the biggest risk in investing. Great projects can be damaged by dubious promoters and seemingly bad projects can be revived by strong promoters.
Lesson 3: Understand the game environment
Now, having a look at the sectoral sentiment also helps. There are chances that a weak investor sentiment for a particular sector would see share prices drop on listing, despite strong credibility.
This is best reflected in the case of Nitin Spinners, a textile company. Textile industry, though of late, has been bearing the brunt of the rupee appreciation, has always failed to be a favourite investment destination. Nitin Spinners?s price went up on the day of listing from Rs 21 to Rs 24 delivering 24.76%, but it got hammered to Rs 12.92.
However, in terms of operating profit, the company has demonstrated a valuable growth of 62.31% on comparison of its earnings of first quarter of FY08 with the first quarter of FY07. It is the textile industry, on the whole, has failed to deliver an encouraging performance and this has impacted stocks of companies like Nitin Spinners.
Lesson 4: Know the support
A person is known by the company he keeps, is an old adage that can be applied in the case of IPO?s as well. Here the merchant bankers and the other participants come into play. ?Many of the shady IPOs have been managed by a certain set of merchant bankers. These are the issues that make huge promises, have little or no background and list handsomely. After some time, these literally go underground,? says a merchant banker who does not want to be named.
It does not take much to know who the reliable merchant bankers are. Additionally, the advantage of having a credible merchant banker means that most of the due diligence of the issue has been done by a trusted agency. Reputed merchant bankers are careful of not having their reputation tarnished and will go the extra mile to ensure credibility, adds the merchant banker.
Then there are the other participants playing the game with you. Sound projects will always have participation from banks and other global financial institutions. ?The presence of private equity funds is also encouraging,? says Singh. Private equity funds not only invest in companies, but also have a strategic stake that enables them to guide the management. This is a definite plus, she says.
Lesson 5: Keep pegging at it
As markers get volatile, there would be times when there are blips in pricing. A company getting listed in a sell-off time might not see it getting the correct price. Long-term investors need not panic. It just pays to be pegging away at the game that you are playing.
Prospects in abundance
The favourite lore of IPO enthusiasts is that the Infosys stock approached the market in 1993 and was listed at around Rs 93. There were not many takers for this issue. As clich?d, the rest as we know is history.
For the investing community, there will be many such chances. There are several attractive opportunities from the power and infrastructure companies that will be coming your way. Also in line will be several banks that would want to expand their capital base to meet regulatory requirements. The best in the IPO market, as they say, is yet to come.