Read this before you subscribe to the next IPO - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Read this before you subscribe to the next IPO 

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In this issue:
» 82 firms default on PF payments
» Who wins the currency war?
» How the ailing West is hurting India?
» Offices in Dubai may remain vacant forever
» ...and more!!

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It may be really hard to ignore the talking heads on TV these days. Their over enthusiasm, large hoardings at landmarks and full page ads in newspapers have become a typical pre-IPO phenomenon. If the company has a respectable brand name the media hype is only magnified. A credible financial history leaves very little option for the retail investor to ignore the issue. Couple these with the discounts especially available to them. Thus we would not blame retail investors if they get lured into investing into such issues. The listing gains would depend on market sentiments. However, long term wealth could certainly come their way if the company's projected future prospects hold water.

But what worries us is the fact that qualitative issues are often ignored in IPO assessments. And this leads to ignorant investors losing their hard earned money. Sometimes very quickly after the stock's listing. And at times at a later date when the can of worms opens. The qualitative issues could range from the management's credibility to corporate governance to business moat. Absence of either of these could lead to investment in an apparently sound business going haywire. Bankruptcy of a newly listed retailing company in 2009 and the latest corporate governance failure of a micro finance lender highlights such issues. Thus it is in the best interest of IPO investors to scan through the finer points in the prospectus. Else one spoilt egg could ruin the returns of your portfolio.

01:15  Chart of the day
India Inc. has got a pat on its back for coming out of the global economic recession healthier than most. The companies have featured higher sales and better margins in recent quarters than their peers in other geographies. A strong cash war-chest has triggered speculations about the quantum of capex companies are about to undertake. As today's chart shows, the net debt per share of the constituents of BSE 100 index stood at Rs 467 at the end of FY10. This was only marginally higher than that in FY04 and FY07 before the start of the respective bull runs. We wonder if this could explain the relative strength of Indian companies.

Data source: CMIE Prowess

There has perhaps been no other time in history when the financial markets have been as volatile as in the last three years. No low seemed low enough and every little increment from the bottom was accompanied with a lot of skepticism. Little wonder, predicting the future of stocks in the financial services sector became such a difficult job. So much so that as per Bloomberg, an analyst getting only 38% of his predictions right became the top ranked analyst in the industry. That he managed to beat around 2,500 analysts worldwide should act as some sort of consolation. There were a handful of others too who missed the top spot by a narrow margin. Interestingly, all of them did not have the same approach to stock picking. While some were top down focused, the others remained bottom up stock pickers. But what amused us most about this piece of news is the fact that the celebrated analyst belongs to firm that barely managed to save itself from bankruptcy! You may have guessed it right - Goldman Sachs!

Corporate irresponsibility seems to have taken a new turn in Gurgaon. 82 private firms have not deposited the provident fund (PF) amount deducted from their employees' salaries in time. And the default amount totals to Rs 19 m. As per PF rules, private companies are expected to deposit the deducted PF amount by the 15th of next month. But many of these firms have blatantly ignored to do this. This is a blow to employees as well as they stand to lose out on the interest on the amount deposited. However, the silver lining here seems to be that the PF department has collected interest on the amount that the companies have not paid in time. Overall, depositing the requisite amounts in the PF account is required by law. Therefore, those companies which are flouting these rules stand to tarnish their image and put their reputation at risk.

In the age of global trade, entire economies can be built on exporting goods and services. The best example of that today is China. But it causes problems for importing nations like US. US policymakers would rather have the products made in their own country, giving more employment to locals. One way to tackle the issue is to adjust the exchange rate. If the Yuan is costlier, Chinese goods denominated in that currency would lose some of their appeal. Of course, the Chinese will have none of it. This angers US policymakers. Of course, the US dollar itself is getting cheaper. It has fallen sharply against most of its trading partners' currencies. So, an all out war of the currencies in on. Traders can make bets on currency derivatives to benefit from the currency war.

Indian economy is booming. North America, Europe and Japan are not. That may sound like very favourable position for India to be in. However, there is one collateral effect of this phenomenon that is not very advantageous. It is sending India's trade deficit soaring. That's because even as India has begun importing more and more on account of its growing economy, exports to the above mentioned developed regions are seeing little or no growth. More so as 60% of India's exports go to these regions. The result? As per reports, India's current account deficit was US$ 13.7 bn for the June 2010 quarter. This compares to US$ 4.5 bn in the corresponding period last year. And this rapidly widening current account deficit has finance minister Pranab Mukherjee worried. He recently suggested that India should ideally have a wider export market besides Europe and the US to correct the imbalances. Good potential for doing this lies in increasing the quantum of exports to our east and south east Asian neighbours. Something India Inc. would do well to work on.

Real estate sector has been booming not just in India but around the world. Developers are building office and residential spaces wherever they can find a piece of empty land. At times even without evaluating whether the property would be saleable. The situation in Dubai seems to provide an answer to this. As per leading property consultants, CB Ellis, a large part of the office spaces constructed in Dubai are expected to remain vacant forever. This is because they are in regions that are very difficult to reach. Even for the spaces that are in favorable locations, the rents will barely cover the cost of maintenance. The landlords are forced to provide incentives like rent free time period and fitting out allowances. But the funny part is that the developers just don't care about this. They are continuing to build more office spaces.

After a strong opening, profit booking in index heavyweights has led the Indian indices to shed gains and nosedive into the negative territory. The BSE-Sensex was trading 107 points lower at the time of writing this. Stocks from the auto and engineering sectors saw the maximum profit booking today. Sentiments across the rest of Asia was, however, upbeat with Hong Kong and Japan leading the pack of gainers. European markets have also opened higher.

04:50  Today's 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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7 Responses to "Read this before you subscribe to the next IPO"

sunilkumar tejwani

Oct 15, 2010

even the best brains in the financial markets falter while predicting the future course of the markets, like what happened in our markets, everybody was betting on a range bound market (Nifty) ranging in 5100-5550 range, & most of the traders/investors went short near 5500 levels in Aug.2010 but market is the most difficult animal to predict its behaviour.
Even today correction of a few hundred points doesnt seem that the upmove is over, may be a small pause or a correction, hungry bulls waiting in the wings will once again get active & start the frenzy on the upside sooner or later. With thanks to the LIQUIDITY FACTOR initiated by the US Fed & European Central Bank, the Money intended to rescue their financial system has found its way to emerging markets. what a polciy!!


sunilkumar tejwani

Oct 15, 2010

the bigger the IPO size i.e. mega issue, bigger the problem of getting a better price in the market due to huge float. every body owns & every body wants to make profit but who will be the fool to buy from secondary market? remember mega IPOs of reliance power(2008) mrpl (1992) they have given -ve returns (for MRPL) inflation adjusted price should have been 400+ but price has fluctuated between 20 & 90 for the past several years.


Agnel Pereira

Oct 15, 2010

Each report from EquityMaster is a gem. Today, the section that mentioned the analyst from Goldman Sachs getting top billing with 38% accuracy was the icing on the cake. I just wonder where our analysts cum trading platform providers (if you want the name, it is ICICI) ended up with. I know they didnt get even 2% right! By the way, you will know, even a stopped watch gives correct time twice every day - so no great achievement if you get 2% of your analysis right!!!
And about IPOs, I am not going to subscribe to the Coal India IPO no matter what. Even if it returns 300% listing gains. they are ultimately India government owned, so efficiency will be in short supply, even if the resources (read: Coal) are plenty. I will check its price after listing, if good enough will buy then, else, there are 1000 different companies to invest in. Whoever invests these days for listing gains is a pure speculator, worser than the day trader in the markets.



Oct 15, 2010

Regarding India's trade deficit - why does no one including experts like you and even our "swadeshi brigade" even talk about save have a plan to reduce our oil imports.
Our oil imports are the single biggest reason for the trade deficit. All of us should realize that when we fill up our petrol tanks or take a taxi, 60% of the bill goes straight to the oil exporting companies.
We have lost the race to alternative / clean energy to China who leads the world in battery technology.
Warren Buffet who we all admire, has invested USD232 million in China's BYD Auto for a 10% stake. BYD and other Chinese companies lead the world in battery technologies.


Sabyasachi Mohapatra

Oct 14, 2010




Oct 14, 2010

I was fooled into buying tax saver units of principal mf and franklin mf.My NAV is now 40% of my cost.I have lost heavily.Please analyse and giive your analysis


Lalit Nahar

Oct 14, 2010

Could you name the 82 firms that have defaulted in provident fund payment?

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