»5 Minute Wrap Up by Equitymaster

On This Day - 9 APRIL 2011
Are 'well timed' IPOs for you?

In this issue:
» BRIC economies to outpace the US
» Middle East unrest gets to Indian banks?
» India Inc needs to revamp business practices & be ethical
» Corporate India on a shopping spree
» ...and more!

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We have all heard of private equity (PE) funds investing in companies and selling out their stakes when the company comes up with an IPO (Initial Public Offering). The PE funds invest early on and then cash out their stakes at much higher valuations through the company IPOs. Usually, the investment period is long and extends over 2-3 years and sometimes even longer.

But off late PE funds are investing in those companies that are waiting to be listed but have not done so yet. That's right. The PE funds are now investing heavily in companies that have postponed their IPO plans due to volatile markets. So one would ask as to how the PE funds would make money in such conditions. Well, they buy a stake in the company at valuations that are much cheaper than the company's planned IPO price band. This way, when the market stabilizes and the company goes ahead with its IPO, the PE fund would still earn a substantial return on its investment.

As per a leading daily, almost 79 companies have filed their IPO prospectuses in the past one year but have not gone ahead with their IPO plans due to market volatility. However, as many of them were planning an IPO to raise funds to meet expansion needs, they did welcome the PE investors. However, the PE funds gave them cheaper valuations than what they had demanded in the IPOs.

But we wonder as to whether these companies are actually good investments for the general investors. They happily lapped up the funds from the PE investors despite the fact that the latter insisted on lower valuations. And now whenever these companies come up with their IPO, it would definitely be at higher valuations, which the PE funds would insist upon. So who would gain out of this entire process? The company and the PE fund for sure. But what about the investors? They may just end up getting stuck with an extremely expensive stock. IPOs that are for whatever reason 'timed' as per market sentiments are almost always bad for retail investors.

Do you think 'well timed' IPOs are worth investing in? Share your comments with us or post your views on our facebook page.

 Chart of the day
Time and again we have emphasized on the need for good education in the country. Only then can the country hope to see the kind of growth rates that it so envisages. The government has been setting aside huge amounts in each of its annual budgets to fund education. A lot of effort is being made to ensure that education is available to all. However, while the government continues to concentrate on the 'quantity' aspect, it is not doing much on the 'quality' front. Little wonder that not many Indian universities get recognition on the global stage. In fact, as shown in today's chart of the day, only 2 Indian universities are ranked in the top 500 global universities. This is equal to that in Russia. In BRIC nations, China ranks the highest with 22 universities in the prestigious list.

Data source: Wall Street Journal

What would the world look like in 2015? We can't tell you if India will win the next cricket World Cup by then or not. But, what we can tell you is that by 2015 the combined BRIC nation economies are expected to take over the United States economy. These countries are expected to contribute one-third of the increase in world's GDP by 2015. This study was conducted recently by leading Chinese economists. BRIC nations currently consist of Brazil, Russia, India, and China. But, this formally became the BRICS this year with the addition of South Africa. This inclusion was probably due to the liberalization of its economy. All these countries are expected to see rapid growth over the next 15 years. This is on the back of a favorable external environment and demographics. It looks like the emerging market growth story is here to stay for the long haul.

We all know that oil prices have been rising thanks to the political turmoil in the Middle East and North African (MENA) region. But there is some other business as well that has been affected as a consequence. The political crisis in Bahrain has forced Indian banks to put a hold on their expansion plans in the island country. Due to low tax rates and easy regulation, Bahrain was fast emerging as a regional hub for banking. About 409 banks and financial institutions are currently operating in the country.

Private sector lender Yes Bank has decided to withdraw the application it had filed to seek RBI's approval to open a branch in Bahrain. Canara Bank too has postponed its entry into the country. The largest public sector lender SBI already has two branches there. As a result of the crisis, it has relocated its Bahrain branch employees temporarily and also stopped routing fresh non-Bahrain business through that branch. It appears that the political tensions are going to keep banks and other investors away from this region for a while now.

It's not too long since Corporate Governance became a household word post the Satyam scandal. And in the past one year we have witnessed a battery of scams in our country. As a result, India's growth story and image have taken a huge blow. Under the pressure of these shocks and Anna Hazare's fast unto death, the Government is finally waking up to the need of sound corporate ethics. The Government auditor CAG (Comptroller and Auditor General) warns India Inc to improve business practices with thrust on quality of financial reporting, high disclosure standards and provision for independent directors.

We have made enough mistakes. It's time to realign moral standards. At this moment, India's highest economic need is higher ethical standards. The recent warning is the first step. The immediate next being a stringent code of conduct and business standards to make sure that companies follow codes in letter and spirit. Without that, it is mere rhetoric. As India gears up for the trajectory to 9% GDP growth rate, sound corporate governance is the harness without which every leap could end up in a great fall.

We had earlier told you that corporate India is sitting on huge piles of cash. The companies could have utilized this cash for funding capex, declaring dividends or for mergers and acquisitions. India Inc seems to prefer the last option this year. A total of 221 deals comprising private equity, mergers and acquisitions and qualified institutional placements have amounted to about US$ 20.6 bn in the year till date. As per Grant Thornton, first quarter of FY2011 has been much better than that of FY2010. In fact, the total amount of deals is the highest in the last 16 quarters. What is interesting to note is that unlike the earlier years, domestic deals have outnumbered the international ones.

However, there is a word of caution here. We as individuals tend to indulge in unnecessary shopping when we have lots of cash. In the same manner, these companies also need to ensure that they do not end up buying unprofitable businesses.

World markets continued their positive run for the third week in a row. The biggest gainer of the week was Hong Kong (up 2.5%) while the only loser of the week was Brazil (down 0.8%). The continuing strong performance of the world markets is believed to be due to the liquidity generated by the US Federal Reserve's quantitative easing programme. This has helped boost markets in spite of negatives such as Japan's nuclear crisis, political tensions in the MENA region, the euro zone's debt crisis and rising interest rates. As far as the Indian Stock markets are concerned, the BSE-Sensex registered a gain of 0.2% during the week. This subdued performance was due to rising oil prices and inflation concerns. Small cap and mid caps have performed better than the broader market and have clocked returns of 5% and 2% respectively. Amongst the sectors, capital goods and realty were the top gainers while energy stocks witnessed a decline during the week.

DataSource: Yahoo Finance, Kitco, CNN Money

 Weekend investing mantra
"Your broker is like a doctor who charges his patients on how often they change medicines, and he is paid more not for what will make you better but rather from the stuff that the street is promoting." - Warren Buffett

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