And the worst performing IPOs are... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

And the worst performing IPOs are... 

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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.

01:30  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.

04:55  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

I agree with your views. That is why I did not touch any of them.



Feb 23, 2011

Well said, Mr. Sriraman. One is forced to think that all these arm-chair experts giving their discources for betterment of the society will only be done by petty satisfaction earned out of tax exemptions, change in other benefits for paltry sums, and the like. The real issue here is the millions who go to bed hungry everyday due to the faulty govt. policies and greed of other previlaged. Instead of suggesting solutions for the same, EM is going into some long winding useless discussions and finally ending every argument with a 'only time will tell' cliche!


Anupam Garg

Feb 23, 2011

valuations don't matter tht much if the company has all the idealistic qualities. expensive valuation is justifiable for such stocks. If the company stands true to its promise, the stock price will go nowhere but up in the long run

& it feels good 2 know tht my views (expresssed earlier here) r near the wavelength of Mr. warren


Gopal Kalpathi

Feb 23, 2011

You have rightly said 'shamefully India stands at 67th position in the hunger index'. When we are not ashamed of so many scams and even our Hon. ministers disobeying the lands highest court's order (refer SCs order to Food and Agri minister about distributing the grains rotting in FCI warehouses)it is not surprising at all. I am not sure if all the hype about demographic dividend is ever going to materialise if we keep ignoring this very glaring disparity. The current spate of revolutions in the West Asian countries should be an eye opener for our politicians. I am only hoping our people will show maturity the next time around during the elections.


Narasimha Rao

Feb 23, 2011

Appreciate your Analysis on Budget expectations.
For Controlling Corruption & illegal activities , there is absolute need for Legal Reforms.Crooks are going scot - free because our present system gives a very long rope to crooks and is incompetent to curb crime.
Narasimha Rao


Sundar Rangan

Feb 23, 2011

PE funds typically invest at rich valuations and wait to exit at opportune time at obscene valuations. The victim is the ever-suffering retail investor either by direct investment or through the so-called agency of Mutual Fund, where Fund Managers are more guided by late-evening cocktails and cuts and in many cases by the presence of Operator behind the IPO. One begins to wonder if CCI regime wasnt better for the retail investors.


Jagjit Singh Ahuja

Feb 23, 2011

I coud not find the list of worst performing recent IPQs

What you reveal is only to create sensation. The real information is never disclosed.Please change your strategy of befooling your subscribers.



Feb 23, 2011

The irony is in both type of news i.e. 300 million hungry mouths as well as rolls-royce's second fastest market, India finds a place. It is government which has miserably failed the poor Indians in this regard followed by the bureaucracy (with its blind eye to social issues and concern for only growth / business) and big greedy business-houses ripping every paise off the consumer's and treasury). The hard-working men and women of this country does not deserve these adds of govt. saying tax is used to give roads to millions. Roads actually needed by the poor people continue to remain in shambles while the roads used by rich in New Delhi, Mumbai are taken care off spending the tax payers millions of rupees. Where is the equity for tax money. And govt's revenue generating assets are given away to businesses at dirt cheap and taxpayer continues to give thousands/lakhs in taxes, inflation, corruption. There must be a anti-government revolution in India than anywhere else in the world.



Feb 23, 2011

Isn’t this ironic that you are expressing concern and shame about the colossal number of starving people in India, while at the same time harping on abolition of subsidies on diesel, kerosene and LPG? You say that the main concern plaguing us is inflation, inflation and inflation but do not see that freeing the prices of diesel, used to transport freight everywhere, will push up costs all round and further fuel inflation! Your suggested relief for the ‘common man’ from inflation is to increase the tax exemption limit from Rs. 1.6 lakhs to Rs. 2 lakhs and to raise the deduction limit for investments to Rs. 2 lakhs! One would think that the 300 million starving Indians are not ‘common’ but ‘uncommon’! The priority should have been to provide gainful employment to these millions so they don’t starve. This goes to show how the economic discourse in India is so skewed in favour of the educated and articulate middle classes. A totally free market economy may be super efficient but by its very nature, can never be fair. Given the chance, it will eat the poor for breakfast, lunch and dinner, instead of feeding them! It is high time that India put the starving and deprived millions on the top of its budget and planning agenda. The priority should not be defined in terms of “growth or distribution” but “growth with justice for all’ and more importantly, should be actually implemented. The burden should be shared by all, and the poorest of the poor should not be made to carry the bulk of it because they do not have a voice that can be heard.


Shome suvra chakraborty

Feb 23, 2011

Promoters' contribution, shares issued at a par or premium, disclosures in prospectus, all are according to SEBI guidelines.

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