Beware before you apply to that 'hot' IPO

Jan 23, 2010

In this issue:
» India isn't next Dubai, affirms Dr. Subbarao
» BRICs to cross another benchmark
» India's energy hunt gets a push
» Large IT spending making a comeback
» ...and more!!

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There has been a lot of clamor in recent times about the upcoming PSU IPOs. Not just the government, even market experts have made a lot of noise about how these IPOs will bring about a revival in the primary market.

Now it is the turn of broking firms, who are expecting brisk business coming from investors applying to and trading in these IPOs! The interesting aspect is whether investors would make money from these stocks that are expected to be issued at premium valuations (this is given the government's current intentions on pricing such issues).

See, we are not against IPOs in general or PSU stocks in particular. What we are worried about is the mis-selling of such IPOs. After all, we have history as our guide when small investors have been mis-sold expensive IPOs using the carrot of big listing gains.

So it's time again for you to stay cautious of such tactics. You need to evaluate each IPO on its merit and then make a decision whether to apply or not. Just that it is a 'hot' theme and there is a retail discount does not mean that IPO is worth subscribing to. Remember Reliance Power?

 Chart of the day
Today's chart of the day makes it clear that gold has been a very good hedge against inflation, even over a long time frame. As the chart suggests, if gold were to move in line with US' consumer price inflation, it would have generated annual average returns of just around 4.4% during 1964 to 2009. Compared to this, the metal has actually generated 7.7% per annum during this period. This can serve as a good guide if you are doubting gold's future in an environment when inflation is set to rise sharply!

Data Source: Bureau of Labor Statistics (US),

Globalization has achieved new meaning in the last one and half years. Earlier the emerging markets were perceived to be disconnected to the developed world. In terms of prosperity and in distress. However, the collapse of Lehman Brothers erased all misconceptions. It was not just the US but the world financial markets that were choked from low liquidity. Credit defaults were rampant in every market worth its size. And big institutions the world over came under scanner.

The recent Dubai debacle brought back the memories of Lehman. A sovereign default of such massive scale gave the impression that nothing is impossible. However, this time there seems to be some real disconnection.

The RBI governor Dr. Subbarao, who has handled the crisis since Lehman's collapse, believes that India is not the next Dubai. He says that countries that have had a history of sovereign debt defaults and currency crisis need to be concerned. But as far as India is concerned, the entry of foreign debt into sovereign debt is quite limited. Since most of the debt is issued to local banks, the question of sovereign default does not arise. While this is a huge relief to investors in India, we believe that the size of sovereign debt also needs to be kept under check.

The BRIC nations are set to scale another height, this time in automobile sales. As per research from the Boston Consulting Group, these nations will together see almost one-third of world auto sales in the next four years.

No doubt, this will provide opportunities for companies in these countries in R&D, sourcing and manufacturing. But what about the surge in fuel consumption and pollution levels? This is especially concerning for a country like ours, where quality roads are a scare commodity in big cities, towns, and villages, and which will lead to even higher fuel wastage!

Anyways, as demand for energy goes up in India, so is the hunt for new resources. And if the government's latest mandate to Indian oil companies goes off as planned, the hunt may well get a huge booster shot. The Central government has now mandated oil companies to double their gas production in the next 5 years. This will require extensive investment in processes and technologies. The government's thrust appears to be on aggressively boosting availability of energy resources indigenously.

Data Source: BP Statistical Review 2009

It is the success of deep-water exploration in the Krishna-Godavari basin, which has given India the much-required confidence to further explore and develop deep-water areas. The Petroleum Ministry has been offering oil and gas blocks to companies under various NELP (New Exploration Licensing Policy) rounds of bidding. So far, these rounds of NELP have yielded great results.

Stock indices across key markets slumped this week, with the Russian index closing as the worst performer. India's BSE-Sensex lost around 4%, led by weakness in stocks from the realty and capital goods sectors.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

We have had a wonderful run up in stocks and investors worldwide have been looking for reasons to take some money off the table. This week, they found some reasons in China's lending curbs and US' plans of limiting the size of banks.

Indian IT companies like Infosys, TCS, Wipro, HCL Technologies and Cognizant are having a very busy day at office these days. It appears that large IT projects and discretionary IT spending is making a comeback on the landscape. The sector that witnessed a dry spell for big budget IT projects last year is seeing some definite signs of revival.

Evidently, the major IT vendors together won total IT contracts worth over US$ 25 bn in last three months of 2009. This was a sequential increase of 47%. Or an annual increase of 8%. What is more, around 20% of these are discretionary IT contracts indicating an improvement in clients' confidence levels.

Importantly, these contracts are broad-based coming from all the major industry verticals and geographies. It suggests that the green shots of recovery are indeed developing some roots. However, the companies are not blindly euphoric about the same. They are still cautious about the impact of subsequent withdrawal of government stimuli from different economies.

 Weekend investing mantra
"To expect a lot is irrational. You're likely to be happier and gain felicity by aiming low." - Charlie Munger, on what to expect from the stock market.

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7 Responses to "Beware before you apply to that 'hot' IPO"


Jan 28, 2010

A caution warning without any technical analyses or some data to support the warning is nothing better than retoric of a class teacher asking the students to be good.



Jan 26, 2010

pl send one copy


S.Sukumar Setty

Jan 24, 2010

Excellent presentation. People who are busy will be benefited by going through the wrap up and have information on varied subjects quickly as the information is so nicely briefed.



Jan 23, 2010




Jan 23, 2010

Predictable! Gold heads down, you start pushing it. You choose 1964 as the starting year - I can take another starting year and make this graph look bad.

Gold, a lot of people believe, will go up because the dollar will go down. But why will that happen, when all major developed countries (whose currencies float freely) are either in the same boat as the US, or worse off? The relative strength of the dollar remains largely intact. The few countries which are growing are either in the third world (whose economies are too small to make a difference) or are one of the BRICs, whose currencies do not really float freely - China's is tightly regulated, India's is semi-free, and has already seen a upmove vis-a-vis the dollar, and Russia and Brazil are not really setting the world economy on fire.

So why does everyone think the dollar will go down? Wishful thinking?

Don't let emotions rule your decision making. Wishing for the dollar to go down, or wishing to see the US in deep trouble is one thing, making business bets on that basis is another.



Jan 23, 2010

There is food for thought in the write-up "Beware before you apply to that 'hot' IPO". Numerous small investors have been lured in the past to to make a mad rush for the expensive IPOs by the false hope of making listing gains created in them by some vested interests. In the process, most have burnt their fingers. Caution can never be thrown to winds, especially in the prevailing circumstances. This is not to discourage any prospective investor. It is just to convey the key message, "Look before you leap".


K.Venkateswara rao

Jan 23, 2010

gold true to your words the best hedge to any countrys inflations since countries itself hedge to gold. citizens should follow it. Regarding IPOs who is following our explanations. Majority r intelligents follow their own mind to burn their fingers.Market crash it is cyclical.Every tide should fall at one or other point of peak but it cannot be predicted by the retail investers.Only big investers playing game with smallest investers who follow the last suite to get traped by former ones.

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