Evaluating the current IPO opportunity

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: With over more than Rs 11,000 crore being raised from the initial public offerings (IPOs) in the current year and a similar amount is to be raised from the public in the next half, it would seem that the IPO market has revived again.

In many ways it has, as there have large and prestigious issuances, like Mahindra Resorts and NHPC, hit the market and collected monies. Even the smaller and medium-sized ones like Adani Power and Pipavav Port have recorded smart subscriptions.

“All this sounds nice, but I have lost a huge amount of money in this IPO business. And if this is happening in the coming days, I would rather stay away,” says Sanjiv Guru, who burnt his fingers in the IPO game. And like Guru, there are others who have started expressing concern over the IPO opportunity. It all started with the much awaited Rs 6,000-crore mega NHPC issue, which after being over subscribed 23 times, gained just about Rs 0.70 on an issue price of Rs 36. It now trades at around Rs 34 levels. There are many others who have a similar story to tell.

“So should we just wait and pick the scrip from the market where we are guaranteed that we would receive the desired quantity from the secondary market?” is a valid question that Guru poses. But then Guru is an investor, who has started thinking like a speculator.

The difference

Parag Parikh, chairman, Parag Parikh Financal Advisory Services, a wealth management firm, and an author on several investment books shams the IPO market. He says, “This entire IPO business is a non-workable deal.” He mentions that he does not encourage his clients to set aside funds for IPOs.

He reasons, “First of all, IPOs are listed close to the market price and then they are sold by merchant bankers who get the mandate to sell the issue largely on their ability to get a strong valuation, this means that their job is to extract the maximum price from investors, so how can you get a good deal. It’s a behavioural anomaly.”

However, Prthvi Haldea of Prime Database, who has been tracking the IPO market over two decades reckons it’s a question of having the right frame of mind. According to him,