The IPO game

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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.