IPOs Set to Make Promoters and Brokers (Not You) Rich

Apr 28, 2016

In this issue:
» The sharp rally in Indian stocks
» Our view on crude oil prices
» ...and more!
Rahul Shah, Co-Head of Research

You shine your shoes, style your hair, and put on an expensive new suit. You want to look your best.

The rule is simple: The better you look on D-day, the more money you get. What you are underneath will not matter, as you long as you can put the spotlight on your strengths and underplay your flaws.

You've been told of this rule. So you hire professionals to help...and spend a big sum of money to pull this off. But that's okay because if you can pull it off, you know people will be queuing up to pay you whatever you ask of them.

For most promoters out there, this is perhaps what goes through their minds when they're thinking about coming out with an initial public offering (IPO) for their company.

And IPO season this is.

The markets have been fast rising ever since they hit a low in February this year. Along with this rise has come in a flurry of IPO activity. Our friends over at the investment banks and brokerages know the drill. These are the times to make money...for promoters.

From what we read in the dailies, it seems the 'top' brokerage houses recommended the Thyrocare Technologies IPO because Dr Lal Pathlabs recently had a great listing. And they're already predicting big listing gains for microfinance company Ujjivan Financial Services (Subscription required) because Equitas Holdings had a stellar listing.

These may be great reasons to speculate in the IPO market. But they're terrible reasons to invest in a company's IPO. In fact, I'll go to the extent of telling you that encouraging such thinking among unsuspecting investors borders on outright malpractice. But as long as it creates a buzz, do they even care?

Equitymaster is often criticised for giving an 'avoid' to most IPOs.

'You are too conservative,' we're told. 'Look at the listing gains we missed out on!'

But we've no regrets. We know what a dirty game the IPO business is. We've seen it over and over again: It's a game where the odds are stacked against investors. So for us, the equation is simple. We'd rather face criticism in the short run than see our subscribers lose money over the longer term. We weren't afraid to do this during the hot IPO days of 2007, and we're not afraid to do it today.

I'm reminded of our founder Ajit Dayal's recent message to small retail investors, which I'd like to leave you with now...

  • Be vigilant, be careful, be sensible. Regulators cannot protect you from your own greed. The financial industry is inherently crooked: It works for its own enhancement of wealth, not for yours.

    We always wished to be the thoughtful, sensible, unemotional view on what was happening in the Indian economy, the global economy, or company earnings and its eventual impact on share prices. We were trying to protect the retail Indian investor from their own emotions of fear and greed and from a well-trained army of financial foot soldiers who were out to grab their wallets.

    We believed then that a better informed investor, a well-educated investor, can make sensible returns on their investments in stock markets. We still believe that but with one modification. There is a saying that you can lead a horse to water, but you cannot force it to drink. In a similar way, I believe that there are many people out there who wish to stay thirsty: They have no desire to learn and understand. They work hard, they save money, then - at some dinner party - they are sold some story and they give away their savings to a smooth-talking financial intermediary. And their wallet is gone. In a bad world, Equitymaster is an open oasis: Those who wish to seek shelter and shade are welcome.

    Do you think investing in IPOs is a good way to build wealth? Let us know your comments or share your views in the Equitymaster Club.

    In case you wish to know more about how we at Equitymaster evaluate and value businesses, you can get a Free hard copy of a Limited Edition 220-Page Book, where we have revealed it all.

    2.18 Chart of the day

    For those following the markets closely, the sharp surge of the past few weeks would have been hard to miss. We think it all started post the Union Budget and the major indices haven't looked back since. As today's chart of the day highlights, both the Sensex as well as the Nifty have notched up gains of 13% and 14% respectively since Feb 29. However, it is their smaller counterparts i.e. the mid and small cap indices that have stolen a march and are up 16% and 17% respectively.

    It would be wrong to attribute the gains just to the budget alone. We believe a combination of factors like stability in the international markets, benign inflation in domestic markets, low crude prices, improved economic outlook in India and a few others are all responsible for the runaway rally. Last but not the least, the valuations were in favor and this put the risk reward ratio of investing in Indian stocks firmly on the investor's side.

    What next? Does this rally have strong legs to sustain itself? Short term, we have no idea. We might as well flip a coin and decide. As far as the outlook over the next 2-3 years is concerned, we recently made a bold prediction that the benchmark indices can go up as much as 70% during this timeframe. The reason? The key trigger would be the reversion in profit margins where earnings growth will get a two-way boost. They will not only benefit from the economic growth but also from profit levels showing an improvement as a percentage of revenues.

    The sharp rally in Indian stocks


    It's not only the best time to buy stocks from a long term perspective but also trade short term using technical analysis.

    At least that's what our colleague Apurva Sheth over at Daily Profit Hunter seems to be hinting at. He recently wrote a must-read letter highlighting four reasons that now might be the best time to trade equities.

    Here's a small snippet from his essay.

    • Most of the newcomers who write to me are interested in the current market situation. They want to know whether it's conducive for trading. Well, let me set this straight. If you wait for everything to be picture perfect before you trade, you will always be waiting. There will always be something of concern. And even when things look perfect, you can never be sure.

    Indeed, as Apurva says, don't just wait for a perfect opportunity to trade.

    If you don't know where to start, or you don't have process in place, or you don't know the right way to trade, Apurva can help you with all of that in his premium short-term stock recommendation service, Swing Trader.


    As a billionaire who's made most of his money investing in energy stocks, T Boone Pickens' views on oil prices need to be taken seriously. Therefore, when he recently opined that oil prices will continue to surge upwards and touch US$ 80 per barrel by the end of next year, we were all ears. Pickens is of the view that currently 70% of crude is used as transportation fuel and until this number comes down significantly, there's no moving away from crude and therefore, current low prices need to go up.

    Well, our view is no different. We think that oil at US$ 40 or 50 is quite low and until alternatives to fossil fuels come up in a big way, crude oil should hover around the US$ 70 to 80 per barrel.


    Indian stock markets were trading weak today with the BSE Sensex down by around 260 points at the time of writing. Weakness was also seen amongst Mid and Small cap indices. Sectors that were facing the maximum selling pressure were auto and FMCG.

    4:56 Investment mantra of the day

    "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." - Benjamin Graham

    This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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3 Responses to "IPOs Set to Make Promoters and Brokers (Not You) Rich"

Girish Kulkarni

Apr 28, 2016

In past i had made money in VRL,Syngene, SHK, Dr. Lal, Alkem,Equitas. I have tendancy to sell shares within 30seconds of listing. I apply very selectively. I earned between 15 to 40 % on allotment of nearly 15000/- i.e. 3000/- per IPO. Fortunately i dind't get catched in any of IPO. In secondary market there is hanging sword on every company and every sector. I am also waiting for L&T Infotech, Vodafone, Pawan hans, Hindustan Aeronautics, Cochin Shipyard and i will keep applying as there are too many fraudland companies in secondary market also.



Apr 28, 2016

Have recently subscribed to equitymaster (just a month back) but am GLAD to see the real news, reports, and views being presented here. I used to get lot of emails on economic happenings outside india, and used to wonder if there is any similar service provider in India, which will present real facts and reports/suggestions & recommendations, rather than going the sheeple way. Luckily, i got to know about EM. I am clear on this : you guys are interested for retail investor safety, and spare no efforts in doing it.

Continue the great job, and hope to get more contrarion reports/recommendations from EM, ESPECIALLY when the US Economy is on a cliff right now, and the next few months seem very dangerous. Need to know safe investments which will create wealth even in the face of economic turmoil.




Apr 28, 2016

I agree to what Mr Rahul had said, in the recent past Coffee day listing had a beating upto 30% and then recently HCG by 15%. Yes some of these companies may do well in the long run, but in short term it's not benefitial . Even Equitas is not doing well. Ujjivan financials the news was the initial Investors will be offloading their shares. So what will happen ?

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