The IPO game

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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.