Where have all the IPOs gone? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Where have all the IPOs gone? 

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In this issue:
» In no mood for an IPO?
» Be on alert, says the PM
» Subdued start to second half for Indian Auto
» Stocks up on rate cuts
» ...and more!!

00:00  In no mood for an IPO?
Share prices being battered left right and centre has scared not only investors, but also the companies who were hoping to take their maiden steps into the capital markets. The month of October 2008 was witness to the highest amount of initial public offerings being withdrawn in a one month period worldwide.

It is estimated that a total of 30 large sized IPOs the world over (valued at US$ 13.1 bn) were pulled out during the month. Incidentally, it is the highest volume of withdrawn offerings in a single month since 1995. As investors are fleeing to what is perceived as the safest asset to hold in these times i.e., cash, the IPO market has almost completely dried up.

The biggest among the pullbacks was the US$ 7.9 bn offering from German railway operator Deutsche Bahn, which would have been the country's largest IPO since 2000.

The situation remains grim as far as the Indian IPO market is concerned. As per statistics from CMIE (Centre for Monitoring Indian Economy), the total amount of money raised in the domestic primary market (including public and rights issue and private placement) in the first six months of this fiscal has been Rs 389 bn. This is 60% lesser than the amount of funds raised during the first half of previous fiscal.

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As far as the second half of this year is concerned, the situation looks bleak as far as any improvement over last year is concerned. This is considering the fact that the second half of last year had the mega issue of Reliance Power that alone mopped up almost Rs 120 bn.

The world has seen several cycles in the IPO market in the past, the last down cycle being the one post the dot-com crash. After this bubble burst in 2000, only 88 IPOs were issued worldwide in 2001 - the lowest annual total since 1979.

As Benjamin Graham writes in his 'The Intelligent Investor', "In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle."

Graham further writes, "In America's first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25% of their value."

Weighing the evidences objectively, intelligent investors should conclude that IPO does not stand only for 'initial public offering'. More accurately, it is also a shorthand for - It's Probably Overpriced, or Imaginary Profits Only, or even Insiders' Private Opportunity. What do you say?

01:33  Be on alert, says the PM
"A crisis of this magnitude was bound to affect our economy and it has. International credit has shrunk with adverse effects on our corporates and banks. Global uncertainty is also tending to dampen investor sentiment." These are the words of Prime Minister Dr. Manmohan Singh as he has asked India Inc. to remain on high alert.

Dr. Singh further reinforced the fact that the government has set its priority as protecting the financial system from possible loss of confidence or contagion effect.

Interestingly, the Prime Minister has hinted at more monetary measures to "provide credit at reasonable rates" going forward. He said and we quote, "The government will take necessary monetary and fiscal policy measures on the domestic front to protect our growth rates."

02:03  Subdued start to second half for Indian Auto
Maruti Suzuki and Hero Honda, India's largest auto manufacturers in their respective segments have reported their highest sales ever in the month of October 2008. Does this mark the end of financing/high interest rate related squeeze on the auto volumes? Has the industry entered a new growth trajectory? Quite unlikely.

The record sales numbers we mentioned are the sales at the retail level and not the company dispatches to dealers, the usual indicators of the health of the industry. In fact, dealer dispatches have come down for both the players, falling 8% and 3% for Maruti and Hero Honda respectively as compared to October last year. Furthermore, there is a chance of dispatches falling further in the coming months as dealers adjust their inventory levels and focus on clearing the existing ones first.

02:29  Exceptional quarter for India Inc.
Apart from economic slowdown fears, Indian companies have had to grapple with one more menace - the depreciating rupee - over the past few months. If one were to go by the performance recorded by most of the companies for the June to September 2008 quarter, a large number has booked large exceptional/extraordinary losses on their foreign exchange transactions and liabilities.

The rupee depreciated by around 6% against the US dollar in October (after the 8% depreciation in the July-September quarter), crossing its all time low of 50 (though it closed the week below this mark). For 2008 so far, the depreciation has been a huge 24%, making the rupee one of the worst performing Asian currencies this year.

02:52  Stocks up on rate cuts
Asian markets closed amidst strength today. Major gains were seen in benchmark indices of Hong Kong (up 3%), Singapore (5%) and Indonesia (8%). The Indian BSE-30 index closed almost 6% up. Strength in stocks was seemingly being spurred by the interest rate cuts announced by central banks across the world last week - US, Japan, China, South Korea, Taiwan and India - to ease the credit crisis.

As reported on Bloomberg, central bankers in the UK, Europe and Australia are meeting this week to consider their options on rate cuts.

In the meanwhile, the Reserve Bank of India (RBI) announced multiple measures to add liquidity to the system late last week. As a matter of fact, it was for the first time since 1997 that the RBI deployed all three of its main tools - CRR, SLR and repo rate - to perk up the credit markets and enable growth.

The Indian central bank reduced the CRR by 1% to 5.5%, the repo rate by 0.5% to 7.5%, and the SLR by 1% to 24%.

These weekend announcements from the RBI came after inter-bank lending rates climbed to as high as 21% on the back of dwindling cash in the banking system. This was due to the continued large scale FII pullout and RBI's actions of stemming the rupee's decline by selling dollars. The FIIs for instance have pulled out almost US$ 12.8 bn from Indian equities this year after the US$ 17 bn investment they did in 2007.

Following this, the rupee has depreciated by almost 24% this year thereby being the second-worst performer among key Asian currencies, after the South Korean won.

Having taken the abovementioned actions, the RBI has also expressed some satisfaction over the inflation (measured in terms of wholesale price index or WPI) coming down to 10.7% levels and global commodity prices, including crude oil prices, cooling off. However, the central bank has reasoned that the global financial turmoil has had unforeseen effects on domestic financial markets and reinforced the importance of focusing on preserving financial stability.

Given that cash remains in short supply in the Indian banking system and there being a continuous outflow of foreign funds, the RBI might persist with its interest rate lowering stance going forward. The receding inflation shall also provide some relief to the central bank in pursuing its near term ambitions.

04:07  Trust the people, not the machine
This seems to be the mantra of investors and speculators in the US, who are seeking human touch amidst the turmoil. As reported by Financial Times, these investors and speculators are now moving a large pr0portion of their trades on the NYSE through people rather than computers. And as the report suggests, "the trading floor of the NYSE, widely written off as a relic, has roared back into action amid the unprecedented volatility, bucking the trend of recent years of less human involvement in favour of automated trading."

The move towards human interaction seems to flow from the trading glitches and erroneous orders that have gone through all-electronic markets in recent times, which would have otherwise been spotted under a system with scope for human intervention.

04:25  Jumbo retires...
Anil 'Jumbo' Kumble, one of the best bowlers India has ever produced, retired from international cricket yesterday. Kumble, who took 619 wickets in 132 Tests, the highest tally for an Indian and third in the all-time standings captained India in 14 Tests.

Having being termed as one of the modern-day greats of the game of cricket by his co-players, Indian and international, Kumble has been India's bowling lynchpin for almost two decades. He has been the chief architect of the country's dominance on its slow home pitches, relying more on subtle variations than sharp turns.

Kumble has troubled batsmen all over the world with his bowling variations including leg spin, googly, flippers and leg breakers. The man is also known for his modest and dignified behaviour on and off the field, which is not so common in present day cricket.

04:48  Today's investing mantra
"I think that one should recognize reality even when one doesn't like it -- indeed, especially when one doesn't like it." - Charlie Munger
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