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Return Of The IPO (It's Probably Overpriced) Season February 4, 2010
We speak to Mr. Vetri Subramaniam, Head - Equity, Religare Mutual Fund to understand and evaluate the initial public offerings lining up in the market.
Author : Dhanashri Rane


Untitled Document

After the failure of banking system in US and the subsequent fall in equities worldwide, the Indian equity market has bounced back strongly to give an 81% return in 2009. The momentum and positive sentiment in the market has driven a number of companies to take the primary market route to raise money for supplementing their expansion plans. NHPC Limited raised Rs. 6,039 crores, the largest Initial Public Offering (IPO) in 2009, as the primary market witnessed an inflow of Rs. 20,343 last year. However, several of these Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) are currently trading below their price band (see Table1). There is a significant line up of public issues in 2010 as well.

Table1: Primary Market Issuances in 2009

Name

Amount Raised (crores)

Issue Price (Rs.)

Listing Price

Last Traded Price

EDSERV SOFTSYSTEMS LIMITED  

24

60

55.00

272.70

MAHINDRA HOLIDAYS & RESORTS INDIA LIMITED

278

300

315.00

460.50

EXCEL INFOWAYS LIMITED  

48

85

93.05

62.75

RAJ OIL MILLS LIMITED

114

120

120.00

79.70

ADANI POWER LIMITED 

3017

100

108.00

101.55

NHPC LIMITED

6039

36

39.00

35.25

JINDAL COTEX LIMITED 

84

75

77.00

95.55

GLOBUS SPIRITS LIMITED

75

100

101.00

98.70

OIL INDIA LIMITED 

2777

1050

1096.00

1240.50

PIPAVAV SHIPYARD LIMITED   

496

58

61.10

56.65

EURO MULTIVISION LTD

66

75

75.00

34.95

THINKSOFT GLOBAL SERVICES LIMITED  

46

125

126.00

439.95

INDIABULLS POWER LIMITED   

1529

45

45.05

36.35

DEN NETWORKS LIMITED 

390

195

195.00

183.75

ASTEC LIFESCIENCES LIMITED 

62

82

82.00

85.65

COX AND KINGS (INDIA) LIMITED  

610

330

343.20

427.90

JSW ENERGY LIMITED  

3819

100

106.00

117.20

GODREJ PROPERTIES LIMITED 

462

490

511.00

510.20

D.B. CORP LIMITED 

385

212

254.00

252.90

source:  NSE India, iFAST Compilations, 15 January 2010

Mr Vetri Subramaniam, Head – Equity Funds, Religare Mutual Fund shares, “The primary market pipeline consisting of IPOs, FPOs and QIPs (Qualified Institutional Placements) including disinvestment by the government will continue to be very active, with anywhere between an estimated US$15-18bn of capital to be mobilised this year. Obviously, this will sop up a significant share of allocations to equities”.

Considering this spurt in number of IPO issuances, we asked Mr Subramaniam for his view on the pricing of these companies.  “Every IPO has to be treated on its merits based on the fundamentals of the company and the value it offers. We would not like to generalize the issue,” he opines, adding that, “The process of evaluation of a company is the same for the primary and secondary market.”

If the fund managers evaluate these companies in a similar manner as any of the other stocks in the secondary market, why is it that IPOs garner so much interest?

With an initial public offer, the shares of a particular company are made available for purchase to the investors for the very first time; also in a follow-on offer, a listed company puts forward fresh sale of shares. Through the sale of stock, companies raise money to support their capital expenditure and expansion plans. Typically, companies prefer to go for a public issue in a bull market. As a result of positive sentiment in the market, the shares are well received in spite of aggressive valuations. According to a study by Assocham, 28 out of 66 companies cancelled their fund raising plans in 2008 owing to the global slowdown. Earlier in 2006 and 2007, companies from the real estate sector had listed at huge premiums in the market.

A large share of the IPOs that came out in 2009 belonged to the Power and Energy sector but these companies were listed at modest prices on the exchanges. “We are wary of valuations and execution issues in the power sector and this applies to the real estate sector as well. Our approach in these two areas is guided by identification of bottom up opportunities where we see value,” says Mr. Subramanian clarifying his stance on both the sectors.

PSU delight for dalal street

Going ahead in 2010, companies from the public sector are expected to dilute additional stake or enter the primary market. Interestingly, IRDA, the insurance regulator is expected to lay down the guidelines for insurance companies as some of the large insurers chart out their public offer plans. Plans to further water down the government’s stake in companies like National Thermal Power Corporation, National Mineral Development Corporation, Power Grid Corporation and Rural Electrical Corporation as well as offer shares of Sutlej Jal Vidyut Nigam through an IPO are around the corner.

When asked about his outlook on disinvestment of public sector units, Mr. Subramanian said, “We expect the government to pursue disinvestment very aggressively in order to bridge the fiscal pressures. This government is keen to unlock the value of its holdings and this will benefit investors. Many of these companies were earlier ignored due to limited free-float and the increased disinvestment will change that and bring these companies to the centre stage”.

Chart 1 shows the performance of BSE Sensex and BSE PSU Index. Both the indices have been rebased to 100 for the period from March 2009 till date. On tracking the relative movement in indices, the BSE PSU Index has trailed the BSE SENSEX but for the month of January 2010. The news of disinvestment has fired up the prices of PSU stocks causing it to surpass the BSE Sensex last month.  The rise in the number of PSU offerings has prompted BSE to come up with a separate website www.bsepsu.com.

Chart 1: Comparison of Indices

Source: BSE India, iFAST Compilations

Conclusion

Even though 2009 has been a good year, retail investors preferred to stay away from the lure of IPOs. The disclosures concerning each issue are stated in the offer document but evaluating a company’s public issue based on parameters such as the quality of management, financials, business environment and economic risks may be an uphill task for a novice investor. Taking an informed decision requires judicious assessment of pricing and future prospects of the company.

Many investors have burned their fingers in the past owing to hype surrounding major IPOs as Kenneth Fisher, Chairman of Woodside, California-based, Fisher Investments Inc put it, “IPO means, Its Probably Overpriced.” Speaking in reference to the Dollar General IPO, he says, “IPOs have never been done for the benefit of the purchaser. IPOs are done for the benefit of the company by definition. So the history of IPOs is very clear that they’re money losing activities.”

Thus, the best way for a newbie investor is to follow schemes of mutual funds wherein the fund manager can do the homework on companies. All you need to do then is, to match the investment objective of the fund with your financial goals and risk profile.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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