Listing losses anyone?

Nov 3, 2015

In this issue:
» Dividend payments are not always good
» India's individual wealth standing
» Problems with Make in India?
» ...and more!

When it comes to IPOs we have not just been value investors but also outright contrarians.

Right from Reliance Power IPO in 2008 to SKS Microfinance IPO in 2010 to the recent mega IPOs of Coffee Day Enterprises and InterGlobe Aviation (subscription required), our views were a part of minority.

The reason? We do not treat an IPO as anything buy yet another stock that investors could consider for long term investment. So there no reason for us to compromise on the moat, management quality and valuations of the company.

However that is not how everyone else looks at IPOs. If you have been a reader of IPO reports you will know that 8 out of 10 talk about listing gains. The brokers endorsing the IPO are particularly interested in getting you to subscribe to the IPO for few days or weeks. They lure you with what is called listing gains. It is assumed that the number of investors chasing the newly listed company will be fairly larger than the ones who have been allotted shares in the IPO. So the price at which the stock will start trading at will be much higher than its issue price.

Well, most companies do have the fortune of trading slightly higher in the initial days of listing at least. With our negative views on most IPOs, subscribers at times tend to be disappointed for letting go of the listing gains. But most do not follow the stock for long post listing to know whether the company was worth staying invested or not.

We never regret missing out on the listing gains part of an IPO that we have recommend to not subscribe. Similarly we do not take credit for rejecting an IPO that fails to impress on the listing gains front.

But the recent poor debacle of Coffee Day Enterprises on the bourses, which had listing losses (down 17%) on the first day of trade, got us worried. There are several reason why investors burn their fingers badly during such IPOs. The experience tends to scar their investing appetite for life. So to avoid a misadventure in IPOs you should never make these mistakes.

Treating IPOs as short term trades: Unlike well thought out short term trading strategies, betting on an IPO as an opportunity to make quick money is mere speculation. The outcome of such speculation can therefore leave you with significant losses.

Treating IPOs as leveraged buy outs: Investing in IPO with the help of an IPO loan to multiply your listing gains can backfire. In the event of listing losses you not just lose your capital but the loan too!

Treating IPOs as the first and last opportunity to invest in the business: Irrespective of how good a company is, over paying for the stock is never a good idea. The IPO is just the first opportunity to invest in the business. So it would be wiser to wait until you understand the long term prospects of the company better or until the stock trades at valuations that offer some margin of safety.

Treating IPO as venture capital investments: Venture capital investors may have the appetite to invest in new and fledgling companies well before they become profitable enough. They offer funds to the company before they can raise money from capital markets. So they look to fully or partially exit the stock with sufficient profits at the time of IPO.

IPO investors cannot have the same risk appetite as venture capital investors. So they should be careful to apply to overpriced IPOs that act as golden handshake for the venture capital investors.

Treating IPOs as a bet on market sentiments: During bull markets investors often assume that nothing could go wrong with over hyped IPOs. The Reliance Power IPO, to a good extent, dispelled this myth. However investors continue to invest in IPOs as a bet on the market sentiment. Little do they realize that sooner or later the fundamentals of the company will catch up with its valuations.

It is how you treat an IPO that will determine whether your decision on the stock is correct or not. Giving a doubtful IPO a miss can in no way reduce your chances to create long term wealth.

Do you think about the chance of losing money in an IPO while subscribing to it? Let us know your comments or share your views in the Equitymaster Club.

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The recent IPO of InterGlobe Aviation too solicited a lot of attention due to the huge payout of dividend to promoters, which left the company's net worth in the negative.

Now, we love the companies which pay handsome dividends to shareholders. Companies with stable and growing dividends are perceived to be promising. However, what if a company pays dividends in spite of poor performance or only for the benefit of promoters?

The case of Vedanta Ltd seems very similar. The company recently, declared its quarterly results and reported sharp decline in its revenues and profits. However company announced double interim dividend from last year's dividend. It is also imperative to note, the overall financial position of the company is already quite weak. Not only that, the rating agency has also downgraded its foreign currency long-term corporate credit rating.

Further, as reported in Mint, when analysts posed the question about sources for paying substantial dividend inspite of poor performance the company mentioned the payment will be done from the dividends received from Hindustan Zinc, its subsidiary. Do note that Vedanta Ltd holds 64% share in Hindustan Zinc.

Dividend payments of this fashion seem to be quite manipulative and absurd to us. Coercing subsidiaries to shell out huge dividends to resolve the parent company's financial problems is against the interest of former's minority shareholders. Hence it will be wise for investors to assess the potential of the companies and not get swayed away by such irrational payments.

 Chart of the day
Recently, the New World Wealth released report of total individual wealth of countries across the globe. Total individual wealth refers to the private wealth held by all the individuals of each country. This includes all property, cash, equities and business interests of each individual in the country.

Today's chart of the day highlights wealth held by the individuals of the Top 20 countries. According to this report, United States topped the list with the total individual wealth of US$ 48.7 trillion, while China and Japan were on second and third position.

India ranks 10th in Total Individual Wealth Globally

India's total individual wealth stood at US$ 3.5 trillion. While India is ranked at 10th place on this parameter, the country falls to 20th place on wealth per capita basis. This was in spite of robust per capita growth. In last 15 years the per capita growth has been 211%. India's demographics and improving regulations have been important factors for this growth. Having said that, going forward India will require much stronger regulations and policies to reduce the income divide for ensuring commensurate growth in India's per capita income.

Talking about India's growth, Make in India, certainly has an important role to play. An article on Mint highlights an important challenge on this front. As per this article, given India's dominant share coming from service sector, it will be challenging for the country to shift the growth triggers from service and re-focus on manufacturing. Along with this, India needs to go long way to bring about structural reforms.

So, does that mean India cannot make headway in the evolution of indigenous manufacturing?

India's manufacturing is largely dependent on government's ability to deliver on infrastructure, labour laws, logistics and other such fronts. While, there are no quick fixes to these problems, measures taken to encourage manufacturing by simplifying bureaucratic procedures and attract foreign investments will go a long way. The government wants to remove the notorious legal and infrastructure hurdles. Serious steps in this direction could open up remarkable business opportunities. And these could be potential Megatrend which can unleash huge wealth building opportunities.

So, while challenges persist, some green shoots are already visible which could bring around vast change in the India's manufacturing Megatrend. And it is certain to impact sectors ranging from engineering to textiles to pharma, banking and retailing. A close watch on this trend is necessary to spot companies that can be the biggest wealth creators riding on India's Megatrend signals

At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 67 points. Gains were seen in metal and auto stocks while energy and pharma stocks were trading weak. The Midcap and smallcap indices were also trading marginally higher.

 Today's investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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Equitymaster requests your view! Post a comment on "Listing losses anyone?". Click here!

4 Responses to "Listing losses anyone?"

Ravi shah

Nov 4, 2015

Dear EQM,Your real time warnings do keep away people from such IPO'S.When they turn out money losing bets that means you have done your home work perfectly.well done and thanks for the real analysis


M M Guna Murthy

Nov 4, 2015

respected madem/sir,

I am having the following unlisted company shares
1.Concord Drugs
2.Western Electrolinks
3. Indian Magnetics
to dispose that please help me



Nov 4, 2015

Better explanation should be in simple language as to whether subscribe or no for forthcoming IPOs rather than with positive and negative Pros and cons, which are beyond understanding for common man like me.

Thanks with regards



Nov 3, 2015

After burnt my fingers with Reliance power and DLF ( Quite heavily) I have stopped looking at IPO,s. Present IPO coffee day they are here to pay their debt arising not out of business, but for looting game. They have real estate, properties but they have not pledged them to pay the debt. They come with IPO to pass on the buck to common people with out any legal complication, like loot and let loot policies. They may vanish like Global trust bank( Ramesh ginagi), Kingfischer ( Mally, sahara( Subratho Roy), Sathyam (Ramalinga Raju), They manipulate like UBS bank ( Adboli)

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Equitymaster requests your view! Post a comment on "Listing losses anyone?". Click here!
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