Look before you leap on these IPOs... - The 5 Minute WrapUp by Equitymaster
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Look before you leap on these IPOs...

Nov 9, 2009

In this issue:
» Dr. Manmohan Singh sees recovery round the corner
» Markets record strong gains on PM's comments
» Can gold hit US$ 1,500?
» Indians lapping up New York properties like never before
» ...and more!

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The Indian government last week announced its intentions to go aggressive on listing of unlisted profitable public sector undertakings (PSUs). And the markets cheered, as seen from the near 5% jump in the BSE-PSU index. This suggests that markets have liked this move though we find no reason for the same. After all, the government will just be divesting a small part of its overall stake and will still be maintaining a strong control on all these companies even after the stake sale. Secondly, almost the entire money raised through the PSU IPOs will go into the government's coffers and nothing will flow into the companies going for listing.

Another thing, and this is the most important, is that you need to be very careful of the pricing of these PSU IPOs. Seeing the high valuations that were asked recently for the IPOs of NHPC and Oil India, the government might be looking to again rake in the moolah by going for aggressive pricing for these new IPOs.

If this happens to be the case, then you can comfortably give the forthcoming PSUs IPO a pass. Having said that, the underlying fact is that it is important to evaluate every IPO on its merit rather than follow any thumb rule.

 Chart of the day
The debt to equity ratio is one of the key metric to analyse to determine a company's financial strength. Alongside this, one also needs to gauge the ability of the company to pay interest on its debt. For a country, debt to GDP and interest payments to GDP are the corresponding ratios to look at to determine the government's balance sheet strength. As for India is concerned, these ratios do not paint a good picture. While our government's gross debt is already very high at around 85% of GDP (Source: IMF), this also means that the government pays a big amount of money as interest payments towards such a large debt. The ratio of net interest payment (interest payment minus interest income) to India's GDP currently stands at around 5.5%, and is estimated to rise to 5.6% by 2014. Amongst emerging markets, this is only matched by a 6.3% level of Brazil, with China and Russia is a much-much better position!

Data Source & 2014 estimates: IMF Fiscal Monitor, November 2009

With the yellow metal gold perched nicely at the US$ 1,100 per ounce levels, bets are being placed on what could be the next probable target. 1,200? 1,300? Some say even US$ 1,500 by the end of 2010 does not look like a very tall order. Indeed, gold has come a long way. But before one gives into the euphoria, it is worth remembering that similar forecasts were also being made for crude oil when it touched highs of US$ 140 per barrel a couple of years back and investors who would have bought into this story, hoping that they could exit at US$ 200 per barrel, would have surely learnt some harsh lessons about asset bubbles the hardest way possible.

Hence, before taking the plunge, a reality check is indeed in order. All things considered, gold is essentially a bet on the collapse of the current monetary arrangement based on paper currencies. And although the US dollar looks like an extremely overvalued currency right now and prone to collapse, what if the US economy does not collapse and actually recovers and the Fed starts raising interest rates.

This should result in inflationary pressures subsiding and could also lead to correction in prices of gold in the near to medium term. Over the long term though, the decline of the US dollar is a far more certain phenomenon and hence, making gold a small part of your portfolio would indeed be the right thing to do.

But as the example of oil demonstrates, do not try to predict the near term scenario and do not go overboard with your bets. Always stay well diversified and invest taking into account long term trends.

Indian markets recorded strong gains today, with the benchmark BSE-Sensex trading higher by around 260 points at the time of writing. Other markets across Asia also traded on a strong note. So was that it? Is the so-called market correction over? Stocks across the world had rallied last week, as the major indices erased most of the losses of the previous two weeks. Now with the September quarter results season over, market direction in the short to medium term will be fueled mostly by emotion.

As far as the Indian markets are concerned, global cues coupled with inflows of foreign money will guide the domestic markets in the near term. Further, recent comments from the Prime Minister Dr. Manmohan Singh, that the worst for the Indian economy was behind and that India is seeing signs of an upturn, are likely to boost the market sentiment, as was seen today.

Speaking at the India Economic Summit in Delhi yesterday, Prime Minister Dr. Manmohan Singh expressed that there are now very clear signs of recovery in the Indian economy. And thus, the stimulus packages that were resorted to during the financial crisis would be wound up by next year.

This comes close on the heels of the RBI raising the statutory liquidity ratio (SLR) to 25% from 24% on 27th of October, thus effectively sucking out some of the liquidity from the system, by ordering banks to mandatorily keep more of their cash parked in government bonds. Additionally, the RBI governor had recently commented that it is now appropriate for the central bank to exit monetary stimulus in a calibrated way.

With this, Bloomberg reports that India may become one of the first G20 nations to begin winding up its fiscal stimulus as policy makers from other countries like the US, Japan and Australia are hesitant to withdraw any of the measures taken to prop up an economic recovery. Now it remains to be seen whether the RBI retains its repute of being the central bank with the best foresight in the days to come.

India's high level of inflation is a major concern considering that Consumer Price Index (CPI) based inflation is quoting in double digits. However, the Deputy Chairman of the Planning Commission, Dr. Montek Singh Ahluwalia is expecting such issues to mitigate as he is expecting food prices to ease in the coming months. According to him, the overall food prices are likely to come down by March, while those of vegetables are likely to decline by the end of the year.

While Dr. Ahluwalia has blamed the monsoons for the overall higher food price inflation (currently at about 13%), it must be noted that historically India has been a food surplus country. In fact, this is precisely why he is anticipating a fall in food prices going forward. However, keeping in mind that there are a good amount of speculators in the form of middlemen who follow malpractices such as hoarding, it would always be a task to keep food prices under control.

Forget Mumbai and its high property prices, Indians are looking for better (and cheaper!) options in New York. After the meltdown in the US property market, house prices there seem to be within the range of Indians as can be evinced from the fact that Indians now account for close to 20% of all realty sales in Manhattan and 30% of all enquiries made.

In fact, India and China are replacing the buyers from Eastern Europe. To put things into perspective, as reported in a leading business daily, average price per sq ft for a Manhattan East side condo is US$ 1,249, while that for a South Central Mumbai apartment is US$ 1,319. This is proof enough that property prices in India are still high at the current levels and there is enough room for them to fall further. But the builders in India just don't want to get the hint!

 Today's investing mantra
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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7 Responses to "Look before you leap on these IPOs..."


Nov 10, 2009

A good suggestion. If the IPO monies do not go for the modernization, expanssion of that unit, then what is the use of PSUs going for IPO.



Nov 9, 2009

Australian central bank is first one to increase the interest rates twice before our RBI did anything. I hope you correct the article.


kirit shah

Nov 9, 2009

your argument has valid points but not the only points that should be considered for investing in ipo of govt. ipos.
no doubt recent ipo of nhpc has not given positive gains, i think it will give in due course.govt. assets r undervalued generally and there working potential is far higher if properly managed. this gives hope of getting better returns in due course.
qibs r ready to grab all the good ipos. no doubt,
there r basic rules for investing but i think govt. ipos will give good investment oppertunities.


Gautam N.

Nov 9, 2009

Thank You very much for providing quality research to us. We hope it will remain the same forever ofcourse with betterment. Once again Thank You



Nov 9, 2009

Under what head the fiscal deficit comes (which almost all governments are printing at full speed)while calculating the Debt equity ratio of a government?

A company can never print money on its own while a government can, and this is the point of my question.


Ram Bhutra

Nov 9, 2009

IPO'S by private companies are cheat.Govt IPO'S are also priced high,still these are much better then private.
Take examples of Reliance Power,India bulls Pwer,Mudra or any real estate companies.It could be these were not IPO's but selling dreams.
Govt companies which are available at fraction of private companies are definately worth keeping.
However one has to weigh before appling.
Most of reserch is biased,it propogates private.against govt.
Where ever govt has given up fully prices to consumers are uncontrobale,govt competation is must.



Nov 9, 2009

You can also buy an apartment in London for the same price in Central Gurgaon High Rise.

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