Are IPO investors smarter this time around? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are IPO investors smarter this time around? 

A  A  A
In this issue:
» Is FDI in insurance an immediate upside for banks?
» IIP numbers come in at a 3 month low
» SBI plans mega online auction of repossessed assets
» ...and more!

It was January 2008 and the sentiment in the market was similar to what it is today. All investors were worried about was that they should not lose out on the opportunity to invest in hot stocks. The frenzy of initial public offerings since 2007 had left investors wanting for more. And the IPO of Reliance Power claimed to whet that appetite. The IPO was not just the biggest but also one that promised to multiply investor returns within days. Not just were investment bankers and brokers endorsing the issue vehemently but retail investors were falling over each other to apply to it. Even the IPO application form was sold at a premium. The fact that the company did not have a single rupee in revenue and profits was the least of the worries. And needless to say while we were probably the solitary research house to have a negative view on the IPO, the issue turned out to be a blockbuster one.

Coming to the present. The spate of IPOs, after almost drying up in 2013 has picked up pace since 2014. The recent IPO of Adlabs Entertainment again reminded us of the Reliance Power issue. Simply because here was yet another loss making company that is determined to sell its stocks to investors at a premium. While the business model and revenue profile of the two companies are entirely different, we wondered whether investor optimism will lead to this issue being very successful. Turns out that this time around majority of the investors agreed with our view. Most of our subscribers wrote to us supporting our view. And not just that! Not only has the company lowered the IPO price band but also extended the issue tenure.

In fact as pointed out by an article in Mint, it is not just this IPO but all the three issue since the start of 2015 that have met lukewarm response in the market. And it increasingly appears that despite the positive sentiments in the market, IPO investors have been cautious and smarter.

As we have always said, IPOs typically offer exit routes to promoters and early investors. Hence unless the issue is very attractively priced, these hardly leave enough valuation upside on the table for investors. And it is always advisable for investors to understand the business model and management quality thoroughly before investing.

Do you think retail investors have become more cautious when it comes to investing in IPOs? Let us know your comments or share your views in the Equitymaster Club.

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The latest move of increasing the FDI cap on insurance companies certainly comes as a relief to the sector. Being capital intensive and with long gestation period, insurance companies constantly need large doses of capital in the initial years. So far, with the FDI cap on them being very restrictive, the companies that floated the insurance companies bore the capital burden. In most cases they were the existing banks and financial entities. The large PSU and private sector banks with insurance subsidiaries were not able to grow the business and it unduly strained their own capital adequacy ratios. However, with the revision in FDI norms, the market is expecting these entities to unlock value in the subsidiaries very soon. Well, that may not exactly be the case.

Growth in the insurance sector has been paltry. New policies sold have grown at an average annual rate of just 4% over the last 5 years. With FDI coming in, foreign investment will increase substantially. However, this will take place over 3-5 years. Many Indian insurers are now valuable and foreign partners will be happy to increase ownership. Several overseas insurers have maintained representative offices in India for over a decade. Perhaps they will consider running full-fledged operations. However, for the parent entities to unlock value in insurance subsidiaries, it will be a long drawn process. Investors therefore need to be careful about factoring in too much too soon.

03:18   Chart of the day
The GDP is projected to rise 7.5% during FY15 based on the revised methodology of the Central Statistics Office. This puts India squarely amongst the fastest growing major economies in the world. But data on the ground continues to fly in the face of this number. The latest of which is the figure for growth in the Index of Industrial Production (IIP) for the month of January released yesterday.

It pegs the IIP at 2.6% YoY for the month of January, which is a three month low as can be seen for the chart. Within this, production of consumer durables fell 5.3% YoY compared to a year earlier. Further, as many as 7 out of the 22 manufacturing subsectors shrank during the month as per reports. While IIP data has tended to be somewhat volatile in the past, what these numbers definitely point towards is the fact that the economy hardly seems to be growing at the kind of pace that the revised methodology of GDP calculation portrays.

Where is the recovery?

Desperate to cut on their mounting stressed assets, many banks these days are attempting to get increasingly aggressive in trying to recover their bad debts. Take SBI for example. A Reuters report indicates that the bank is going to hold an online auction this weekend to sell repossessed flats, warehouses and offices. In total, these assets being auctioned are worth nearly US$ 200 m, and will be the biggest online sale to date in the country. All in a bid to bring down its bad debts, which are estimated to be in the region of US$ 10 bn.

It's not surprising that banks are stepping on the gas as far as recovering their dues are concerned. New regulations that are slated to take effect in a few weeks prescribe that banks take on much larger provisions for stressed loans than they were taking hereto. What was previously labeled as 'restructured debts', will now have to be reclassified in their accounts as 'bad debts', increasing the provisioning required. With estimates pegging that over 10% of the Indian banking industry's loans have soured, the magnitude of the problem is grave indeed. While banks' getting increasingly innovative and aggressive at liquidating stressed assets is very much a positive, what is also the need of the hour is that banks, especially ones from the public sector, also aggressively tighten their lending processes and practices.

The Indian stock markets took the toll of sharp correction in index heavyweights today. At the time of writing, the BSE-Sensex was trading down by around 429 points. Losses were largely seen in capital goods, auto and banking stocks. As far as global markets are concerned, while most Asian indices were trading firm at the time of writing, the European indices were trading mixed.

04:56  Today's investing mantra
"It is not the profit margins of the past but those of the future that are basically important to the investor." - Philip Fisher
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This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

Equitymaster requests your view! Post a comment on "Are IPO investors smarter this time around?". Click here!

3 Responses to "Are IPO investors smarter this time around?"

Sarat Palat

Mar 14, 2015

Yes, of course. Experience is the teacher.



Mar 14, 2015






Mar 13, 2015

Retail investors suffer in general due IPO euphoria of two kinds. Oversubscribed IPO & hence allotment of peanuts & therefore pittance gain when the going is right & for most part of IPOs, booking heavy losses, on the day of listing, when they discover that the IPO price-band 'discovered' by the cohorts of IPO issuers i.e., the so called merchant banker, independent assessors 'helping' in the 'discovery' of 'fair IPO price band' always go horribly wrong (what a cozy coincidence!) and the stock tanks.

Despite that, I am sure that the flock of goats aka retail investors will continue to run after pumped-up issues. Yet, in the case of the Junior Ambani's AdLab, experience of getting hurt due many a consistent Vapourware IPOs coming from these stables (after a preferential allotment of 40%, to promoters, surprise surprise, AT PAR), which are heavily overpriced at IPO time, thanks to above mentioned 'helping hands' & to add insult to injury, the Junior, putting out outrageous statements such as 'Worlds largest IPO', 'Worlds largest oil terminal', 'Longest ever oil pipeline', 'Biggest movie company of the world, having Steven Spielbergs queuing up' etc etc helps promoter's benamis to sell their at par preferential allotments, soon after IPO & scoot with astronomical profits. An year down the road, poor retail investors are saddled with a stock that has lost more than 75% of IPO subscribed value & there is nothing significant left on the ground either, belonging to the World's Largest...fill in the blank! This bold pattern of (many times) looting seems to have atlast taught a lesson to the retail lot, in particular!

If it were anyone other than Junior, I am sure Retail Jantha will run after any IPO, with lots of hope & anyway end up booking, smaller but confirmed losses, after listing. Afterall they are having a lot of cash in hand, waiting for elusive Achey Dhin!

Besides, never mind the (un)Safe Harbor statements of you-know-who, the sentiment that any retail punter not subscribing to the IPO when there is a 10% discount, only for them, is a fool, never mind the genuine independent assessment by the many biggie market players (market makers) saying that the issue price in their view is (very much) over priced,

I lived in a middle-east country for many years with my wife & children. Once, the national Monopoly Tel co announced that ISD rates will be halved during week-ends, to make some money on the installed infrastructure, lying idle over wek-ends. My wife used to tell me, "We should not be fools to miss out on 50% discount going waste" & call her mother back home, talk for hours, drilling a hole in my wallet".

My wailing "if they did not offer the special discount, we would have saved 100%, as you would not have made that hour long call, you telling your mom, in the first half an hour, what dishes you made for every session of the weekdays & she replying what she did, in the rest of the half an hour." ...well, my wailing was not heard at all, as they both hold the same view like most of us Indians: if it is a long distance call, you must shout to make sure that your voice is heard at the other end which is some 1500 km away. Their view was not very wrong, while in India. Thanks to the spoilt monopoly called ITC, living in Graham Bells' era made all the telephone equipments & exchanges in the country, whenever their staff were not on strike demanding more money, for not working, with good support from Comrades of Calcutta & Cochin, you better shout to be heard at the other end of STD or ISD calls!!

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