Better be careful than sorry

Indifferent secondary equity markets have meant poor IPO markets too.

Indifferent secondary equity markets have meant poor IPO markets too. If we look at the data over the past 18 months or so of the 60 companies that came to raise capital,only 12 have managed to give a decent return to investors,another 6 or so are trading above their issue price while a staggering 20 companies are trading lower by 50 per cent or more from their issue price while the remaining 12 are even lower.

In this period about six IPOs were withdrawn this included Samvardhana Motherson Finance a group company of Motherson Sumi,a listed player with good presence in the auto ancillary space. It was shocking that the company could not garner sizeable subscription. The recently concluded Speciality Restaurant IPO has also just about managed to scrape through.

Are the ills of IPO market more than just weak markets? What should an investor look to do in such a case? Very often a buzz is created in a company at IPO time and we see investors lining up to invest. But the cold hard reality is that IPO investing has been a risky game. Even fancied IPOs like the Multi Commodity Exchange of India,which recently got listed is now trading below its IPO price.

Even when you look at the list of IPOs that have done well,it is not a list that can throw up any conclusive answers. It is not that the well known companies with established products have done well,or that they are companies with some cutting edge technology and great managements. If you see the list its a motley group textiles,realty etc.

If you want to invest in a good quality stock make sure that you go through the prospectus very carefully and read the plans of the company. Is it an offer for sale,where you are only providing an exit for PE investors or are the funds going to be actually used for future capex? If all this meets your satisfaction then look at the price multiple they are asking for. Is it in line with what others within the sector are demanding or is it at the higher end of the PE band? A couple of years back we had a spate of power companies at fancy valuation and today most of them are facing a tough operating environment and are nowhere near completing their projects and trading well below IPO price. So beware! It is better to be careful than sorry.

When we look at the data,what we find is that what has worked in most cases is to apply in an IPO and exit on the day of listing. We find that while you would still stand to lose in about half the cases but the amount that you would have lost would have been lower. This is a strategy that most traders apply in IPOs for listing gains. On the day it lists they sell off and just flip that amount over to the next IPO. Data bears out that this indeed is a more sensible strategy.

Like a weakening currency is a lead indicator of weakness in the equity market,it is when IPOs begin to get good subscription that we can expect secondary markets also to start doing better. IPOs remain a key tool for corporate India to raise funds for future plans and gives us an opportunity to participate in their growth story but we must invest carefully.

Author is Head Equity,Fairwealth Securities