How hungry is the market?

The long-elusive retail investor is back in the equity market, one that has already consumed all the mega public offerings and issues and lo...

The long-elusive retail investor is back in the equity market, one that has already consumed all the mega public offerings and issues and looks as if it is hungry for much more. If the TCS issue, that got 12.5 lakh retail investor applications, signalled increased retail interest, NTPC getting a record 14 lakh applications from the 8216;small8217; investor is a confirmation. Small money is back in the market. But how hungry is this market and should you contribute to the appetite by breaking your fixed deposit FD?

Over Rs 30,098 crore has already been raised by 27 companies this year. These 27 issues saw a retail participation of about 25 per cent of the issue amount, so at least Rs 7,500 crore has come from the 8216;small8217; investor and the rest from the Foreign Institutional Investors FIIs, the institutions and the High Net Worth Individuals HNIs. 8220;For the last few years, the IPO market did not see much activity. Right now, there is a hunger for IPOs,8217;8217; says Asit Kotecha, MD, ASK Raymond James.

Indeed, another 80 companies wait in the wings with paper worth Rs 40,000 crore. Prime Database says the forthcoming issues include PSUs, banks and other private sector companies. Some of these include: Gujarat State Petroleum, Haldia Petrochemicals, Power Finance, Rashtriya Chemicals, Allahabad Bank, Bank of Baroda, Dena Bank, PNB, Syndicate Bank, AB Corp., Cyber Media, Daksh, Deccan Chronicle Holdings, Fortis Healthcare, GE Capital International, HDFC Bank, Hutchison, Idea, IDFC, IL038;FS Investsmart, Jet Airways, Mahindra 038; Mahindra Financial, Raj Rayon, Reliance Infocomm, Shopper8217;s Stop, Thomson Press and UTV. Big names most, some with years of performance and pedigree behind them.

How different is this from the previous booms?
The last time the IPO market boomed the small investor burnt his fingers. Unscrupulous promoters floated companies whose only aim was to defraud. But this time around, the situation looks different. Compared to the previous experience, a pedigreed lot from India Inc is unlocking their doors to the public. 8220;In the last such boom, the valuations were very high and there weren8217;t many good companies coming out with IPOs. This time, I think the investor is more aware and is keenly watching the scene,8217;8217; avers Kotecha.

The small fly-by-night operators are still to get around Sebi8217;s vigil. The last spike in the IPO market was in 1995 when 1,444 companies gathered Rs 13,887 crore, while 2004 has seen more than twice that amount collected by just 27 companies. The issue sizes are larger and are coming from lineaged backgrounds, unlike the previous years, where one genuine company came in a crowd of 20 duds. The list of IPOs above reads like a who8217;s who of India Inc. There are well-known and established brand names unlike the hordes of unknown paper tigers that only advertised five months before their issue to get the retail mind-space and money. The pedigree is right, the price seems to be right, so should you buy?

Trick or Treat?
First, a caveat: IPO investing is seen as the riskiest kind of equity investing the world over and retail investors are usually not big participants. Funds and institutional investors buy IPOs and the retail market works through mutual funds. But, if you are willing to take the risk, there is certainly a case for buying from the primary market today. Given that the government-assured return schemes are being reduced in number the tax-free RBI bond has gone and some other schemes are next on the block and returns are still falling, you need an instrument that will build growth into your portfolio. Equity is one of the best options to do so. But it carries risk.

The current batch of IPOs in the market does expose you to market risk 8212; the risk of the business not doing well due to internal or external factors 8212; but does not carry any significant promoter risk. That is, the intention of the promoters is not to defraud investors by taking money and vanishing. This is the risk that most investors cannot handle 8212; the risk of fraud. Given the current batch of IPOs, this risk seems to be missing from the market since most companies have existing businesses in place and are leveraging their holdings to grow faster.

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Given that the price is still right, the intention is not suspect and alternate investment options like bank FDs and government paper are giving lower and lower returns, it is indeed a good time for you to allocate a part of your portfolio to equity, if you can take market-risk. 8220;A retail investor should always look out for a few things8230; like the track-record of the promoters, how the company is planning to use the money. It8217;s important also to know that the investment banker for the IPO is good and so on,8221; says S. Subramanian, co-head, Investment Banking, Enam Financial.

But do remember that after this round is over, there may be companies that enter with the only intention of defrauding you 8212; so look very carefully at the promoters and their businesses, look at the past track-record of the company, use the Internet to search for information that the IPO ads may not reveal about the companies or their promoters.