Though
you may be tempted by the IPOs, it is important to consider the reason
for the issuance as well as the company’s valuation and fundamentals
before investing in one.
After
remaining dormant for several quarters, the primary market is showing
signs of revival. A slew of public issues is slated to come out in the
coming months, much to the delight of the market participants. “The
revival of the primary market is a positive sign because it reflects the
improving sentiment. If any of the bigger issues turns out to be
successful, it will enhance the sentiment further,” says Vibhav Kapoor,
group CIO, IL&FS.
The forthcoming public issues can be
broadly classified into three categories. The first lot includes IPOs of
companies that were waiting for the sentiment to improve before tapping
the market. Among these are some mega IPOs, including Bharti Infratel.
If the company manages to raise around 4,500 crore as planned, it will
be the biggest IPO since the Coal India issue in November 2010. Besides
the IPOs, there are follow-on public offers (FPOs) and rights issues
from the existing companies, which want to raise funds for specific
needs.
The next set has PSUs that have been put on the block by
the government. The disinvestment proceeds will be used to reduce the
fiscal deficit. The third category comprises private-sector companies
with a very high promoter holding. These companies have been asked by
Sebi to reduce their promoter holding to 75% before June 2013. They may
launch FPOs or take the new offer for sale (OFS) route offered by Sebi.
Will
this supply of new shares suck out the liquidity and bring down the
overall market? Perhaps not, at least not in the near term. Experts
believe there is no rush. “There is a pipeline of issues, but this can’t
be called a rush. The companies are still deferring the issues because
they are not able to get the right price,” says Prithvi Haldea, chairman
and managing director, Prime Database.
However, this does not
apply to PSUs and companies that have been asked to reduce their
promoter holdings. The decision to go public
has been forced on these companies and they have to act in a time-bound
manner. The government has already announced a divestment target of
30,000 crore for this fiscal year and PSU issues will flood the market
before March 2013. Sebi, too, has not shown any inclination to extend
the deadline. “If all the promoters come to the market close to the
deadline, it will result in a pressure on the market,” says Kapoor.
The
increased supply may bring down the prices of individual stocks.
Consider the impact of the OFS announcement by Hindustan Copper. The
floating stock of the company (shares available for trading) was only
0.41% of the total equity. Its shares were quoting at 260 when the
government decided
to keep the minimum bidding price at 155. The additional supply could
not be absorbed by the market even at this lower price and, finally, the
issue was bailed out by LIC and some PSU banks. The Hindustan Copper
shares hit the lower circuit for the next three days, and are currently
trading below the floor price of 155.
Experts believe the story
may not be repeated with other PSU scrips that are expected to hit the
market soon. “The proper price discovery did not happen at Hindustan
Copper before the OFS issue because of lack of enough liquidity.
However, this price discovery is already happening in the case of NTPC,
SAIL, etc, and, hence, the issues may be successful if the government is
ready to give a reasonable discount to the current market price,” says Kapoor.
Invest or leave?
For
investors, the big question is whether to invest in the new issues.
Though there is a lot of hype surrounding public issues, the IPOs that
have come out in the past two years have not impressed with their
performance, with the BSE IPO Index underperforming the broader market
(see chart).
Theoretically, the best time to invest in a stock
is when it is about to start with its growth trajectory. So, IPOs give
you an opportunity to participate in the growth prospects of that
company. However, the reality is that investors can lose heavily if they
put their money in overhyped IPOs.
Why do investors get excited
about IPOs? First, unlike other stocks that are already listed in the
market, IPOs are pushed by the company’s management, merchant bankers
and brokerages. So, there is a concerted effort to market the shares. A
lot of positive news and analyses are floating around during
the launch of an IPO. Second, some recent IPOs have given excellent
returns, even though several others have failed to live up to the
expectations (see table). A good IPO can turn around your portfolio and,
therefore, the hope that the next one turns out to be good attracts
gullible investors to the primary market.
The problem is that
when stocks are doing well, a lot of IPOs flood the market, and it is
important to separate the chaff. If you consider the IPOs that have
given good returns, most of them are driven by the consumption theme.
The consumer product companies have been leading the market rally for
the past 2-3 years and, therefore, it is natural that those like
Tribhovandas Bhimji Zaveri and Lovable Lingerie feature in the list of
winners. The pharma sector is another hot sector now and this explains
why Aanjaneya Lifecare is in the list.
A good IPO is one that is priced reasonably, leaving enough on the table for the investor. Coal India was one such issue,
which created wealth for investors despite the sectoral and regulatory
headwinds faced by the company. So the rules for evaluating an IPO are
no different from choosing a stock in the secondary market. “Investors
should only go with companies that have quality management, high growth
rate, good profitability and are offered at reasonable valuations. After
all, these IPO stocks are part of the same stock market,” says Kapoor.
Since
most IPOs will hit the market with a lot of hype, it is possible that
retail investors get carried away. Choose a wrong stock and it could
kill your portfolio. Here are some danger signs to watch out for: Exit strategy for promoters: Be
careful if the IPO is an exit strategy for the promoters, private
equity investors and venture capitalists, since most of them will be
waiting for an opportunity to dump the stock on gullible investors.
Study the offer document to know how much stake is being offloaded
through the public issue. If the percentage is very high, it is a red
flag for investors. Flavour of the month: Avoid low-quality companies trying to ride the theme of the month.
Market veterans will recall how several finance companies added
‘infotech’ to their names before coming out with IPOs during the dotcom
boom. Valuation is key: The pricing of the IPO is of utmost
importance. Even a good quality company at a high price is a bad
investment. The Reliance Power IPO was priced at a much higher valuation
compared with several listed power generators, such as NTPC and Tata
Power. Make sure that the stock is not priced higher than the other
stocks in the sector. Compare the PE ratios of the company with those of
its peers.
The list of IPOs in the pipeline is very long, but
experts think that only a few of these will prove to be worthwhile
investments. “Except the Bharti Infratel
issue, which may hit the market soon,
there is nothing much for retail
investors,” says Haldia.
Should you sell on listing?
Given the losses from IPOs, a lot of investors in the primary market book profits on the listing
day itself. However, this is not a
recommended
strategy because the listing day price is very volatile and often
manipulated. Even good IPOs can have a shaky start. Tribhovandas Bhimji
Zaveri lost money on the listing day, but recovered later. If you had
exited at a loss on the listing day, you would have missed out on the
opportunity to earn 139% returns.
Even so, many investors swear
by this method. Of the 59 IPOs in the past two years, 34 (or 58%) would
have generated positive returns if you had sold them on the first day of
trading (computed on a closing basis, because the first quote is mostly
manipulated and it is almost impossible for anyone to get out at that
price). Some of the big losers like Birla Medispa and Inventure Growth
& Securities had generated handsome listing gains.
FPOs & OFS
The
follow-on public offerings are easier to evaluate because the stock is
already listed in the market and the data is readily available for the
past several years. Besides, you know about the aptitude of the
management, as well as the growth prospects of the company. The only
thing to watch out here is the manner in which the company intends to
use the proceeds. Is the money being raised to expand the business or
just offload shares held by promoters?
As mentioned earlier,
most of the FPOs and OFSs are not business decisions but have been
forced by circumstances. The PSUs are coming out with public issues
because the government needs the money to bridge the fiscal deficit.
Some of the private-sector companies that need to bring their promoter
stake to 75% are also coming out with FPOs. Though bad for the company,
forced issues are good for the retail investors because they are a great
investment opportunity. Those who had bought the shares of MNCs, which
were forced to go public in 1977, will vouch for this because many of
them have made fortunes from them.
Source : Narendra Nathan, Times of India, 03/12/2012
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