And the worst performing IPOs are...

Feb 23, 2011

In this issue:
» Hunger pangs for the poor Indians continue
» Common man's expectations from Budget 2011
» Indians' appetite for luxury cars on the rise
» 'Jobless youth' is a big problem
» ...and more!

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Year 2010 would be a memorable one in the years to come. A year that marked the revival in global economy. A year that saw gold touch new highs. A year that saw a surge in silver prices. Closer home, India would remember it for the number of scams that were unraveled. But it was also a year that saw a huge flurry of IPOs by Indian companies. There were a whopping 73 companies that came up with their initial or follow-on public offerings during the year.

Interestingly, not too many of these offers are doing well on the bourses. In fact, almost 72% of these offerings are trading way below their offer prices. But the worst performing IPOs were actually those that were backed by the private equity (PE) funds. As per a study conducted by a leading daily, 80% of the PE backed IPOs are trading below their offer price. One of the biggest reasons behind this that most of these firms were looking to make killer gains on their own investments. And the buoyant stock markets provided them with the perfect opportunity to do so.

As a result, most of the PE backed IPOs priced at ridiculously high valuations. And since they were marketed so well by the companies' promoters and other brokers, investors just lapped up the shares that were offered. But eventually the prices of these offerings corrected to reflect the company's fundamental strength in most cases. Therefore, while the PE firms made a 'killing', the investors got stuck with stock losses.

This brings us back to the main issue of valuations. It is the most important thing to look at while investing in a company. Even if the company is fundamentally sound has an excellent track record, fantastic growth prospects and an honest management, still it has to be available at cheap valuations to invest in. Unless the valuations are compelling, one should stay away from the best of stocks. Only then can one maximize his return on investment.

Do you consider valuations to be most important while making an investment decision? Share your comments with us or post your views on our Facebook page.

 Chart of the day
300 m. That's the population of the US, and slightly less than the combined population of Brazil and Russia. In India, 300 m is the number of people haunted by hunger each day! We shamefully stand at the 67th position on the Global Hunger Index. Now that's an alarming situation, even worse than that faced by certain countries in the relatively poor African continent.

Data source: International Food Policy Research Institute

India's poor standing on the hunger front is despite the strong GDP growth rates clocked by the economy over the past few years. The situation is just going to get alarming as food prices continue to rise! Imagine the social unrest if nothing is done to alleviate the hunger of millions of Indians over the next few years.

We have already compiled the pre-Budget expectations for various sectors of our economy. Now, what does the common man expect from this year's Union Budget? Before we discuss that, let us ask ourselves one question. Which is the main concern plaguing us all? We all know it. It is inflation, inflation and inflation! So what are some measures that could give some relief to everyone's pockets? Here are a couple of things that a common man wants in this year's Budget.

Firstly, the tax slabs should be brought in line with the slabs proposed under the Direct Tax Code (DTC). The basic exemption limit should be raised from Rs 160,000 to Rs 200,000. For women and senior citizens, the limit should be raised to Rs 250,000 and Rs 300,000 respectively.

On a similar note, exemption limits for various allowances should be raised. The exemption limits were last revised in 1997. During the period between 1997 and 2011, the overall prices levels have shot up multifold. Hence, the exemption limits need to be brought in line with the market reality.

Also, individuals can currently claim deductions for specified investments only up to Rs 100,000. This should be further raised to Rs 200,000. This will have dual benefits. One, the common man will have a lesser tax burden. Two, it will give a great incentive to make investments which can then be meaningfully channelized to boost the economy.

The word Rolls-Royce immediately brings to mind images of luxury and grandeur. Clearly, if one wants to signal his arrival, there are very few statements that can better that of owning the super luxury premium automobile.

Thus, we sit up and take notice when the company's CEO tells us that India has become the second fastest market for Rolls-Royce in Asia. This further reinforces the fact that India has certainly arrived, isn't it? We believe there is a small problem here. Sales of ultra premium cars like Rolls-Royce are booming all right but how would you reconcile this with the fact that overall car and two-wheeler penetration in India is lower than even other developing nations. Thus, is this trend of rapid growth of high end car sales a sign of India's arrival or the growing divide between the rich and poor in India? Sadly, the answer is not easy to find. This is because rapid economic growth makes it difficult to pin point whether all of the society is actually getting rich or only a few minority at the expense of the majority. The trend in vehicle sales does give an idea of the lopsided economic development. Thus, till such time as overall penetration in India improves, there is no point in rejoicing at the fact that Rolls-Royce is warming up to India.

India in recent times has been attracting a lot of interest, one reason being its strong GDP growth. But the other thing that has caught the fancy of many is the country's strong demographic dividend. This essentially means that the country has a large number of working youth who will go a long way in enhancing the economic growth in the years ahead. In fact, according to the US census bureau, in 2011, India's working-age population will be 64.9% and is expected to peak at 67.5% in 2031. But is having a large number of working population simply enough for the economic health of India? Not really. What needs to be determined is how educated this youth is. More importantly, do they have the right skills that will match the expectations of the market and the industry? Education by itself has no meaning unless it has relevance and is applied in any workplace. In that aspect, India may not necessarily deliver. The services and manufacturing industries may not be able to absorb the huge bulge in India's young working population. This means that investments will have to be made in agriculture and agro-processing facilities and vocational training in these skills. Otherwise, India's uneducated youth could turn out to be a dangerous liability.

In the meanwhile, the Indian markets are trading in a narrow trajectory. India's benchmark index, the BSE Sensex was trading higher by about 5 points at the time of writing this. Stocks from automobile and energy sectors are the main gainers. However, IT stocks are witnessing the onslaught of the bears. Oil and gas was trading firm. The Asian Indices were trading weak with Hong Kong and Japan both in the negative territory. The European markets seem to have opened lower on account of weak sentiments.

 Todays investing mantra
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

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11 Responses to "And the worst performing IPOs are..."


Feb 23, 2011

my suggestions for this budget:
1. stop all the forcible land grabbing by govt/private agencies and immediately scrap the land acquisition act of 1894. A new act should be passed by parliament giving authority to farmers about whom to sell andat what price.
2. immediately stop all the development projects. apprise all these projects in transparent ways.let there be a public white paper on the project affected persons so far. find out their plight. employ mba's for this purpose. otherwise what is use of having all these mbas?
3. senior citizen's age for income tax purpose should be made for 60 years instead of 65 years presently. why there be anomoly in senior citizen's age for this?
moreover their interest income should be made tax free upto Rs. one lakh. let the young generation bear this cost. they r not getting any hra, cca or traveling allowance.
4. increase the income tax rate for neo rich people. make all the elections taxable for political parties since they r using black money garnered and make more money. make their election expenses accountable to public and accessible.

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