Listing losses anyone?
(Nov 3, 2015)
|A A A
In this issue:
» Dividend payments are not always good
» India's individual wealth standing
» Problems with Make in India?
» ...and more!
When it comes to IPOs we have not just been value investors but also outright contrarians.
Right from Reliance Power IPO in 2008 to SKS Microfinance IPO in 2010 to the recent mega IPOs of Coffee Day Enterprises and InterGlobe Aviation (subscription required), our views were a part of minority.
The reason? We do not treat an IPO as anything buy yet another stock that investors could consider for long term investment. So there no reason for us to compromise on the moat, management quality and valuations of the company.
However that is not how everyone else looks at IPOs. If you have been a reader of IPO reports you will know that 8 out of 10 talk about listing gains. The brokers endorsing the IPO are particularly interested in getting you to subscribe to the IPO for few days or weeks. They lure you with what is called listing gains. It is assumed that the number of investors chasing the newly listed company will be fairly larger than the ones who have been allotted shares in the IPO. So the price at which the stock will start trading at will be much higher than its issue price.
Well, most companies do have the fortune of trading slightly higher in the initial days of listing at least. With our negative views on most IPOs, subscribers at times tend to be disappointed for letting go of the listing gains. But most do not follow the stock for long post listing to know whether the company was worth staying invested or not.
We never regret missing out on the listing gains part of an IPO that we have recommend to not subscribe. Similarly we do not take credit for rejecting an IPO that fails to impress on the listing gains front.
But the recent poor debacle of Coffee Day Enterprises on the bourses, which had listing losses (down 17%) on the first day of trade, got us worried. There are several reason why investors burn their fingers badly during such IPOs. The experience tends to scar their investing appetite for life. So to avoid a misadventure in IPOs you should never make these mistakes.
Treating IPOs as short term trades: Unlike well thought out short term trading strategies, betting on an IPO as an opportunity to make quick money is mere speculation. The outcome of such speculation can therefore leave you with significant losses.
Treating IPOs as leveraged buy outs: Investing in IPO with the help of an IPO loan to multiply your listing gains can backfire. In the event of listing losses you not just lose your capital but the loan too!
Treating IPOs as the first and last opportunity to invest in the business: Irrespective of how good a company is, over paying for the stock is never a good idea. The IPO is just the first opportunity to invest in the business. So it would be wiser to wait until you understand the long term prospects of the company better or until the stock trades at valuations that offer some margin of safety.
Treating IPO as venture capital investments: Venture capital investors may have the appetite to invest in new and fledgling companies well before they become profitable enough. They offer funds to the company before they can raise money from capital markets. So they look to fully or partially exit the stock with sufficient profits at the time of IPO.
IPO investors cannot have the same risk appetite as venture capital investors. So they should be careful to apply to overpriced IPOs that act as golden handshake for the venture capital investors.
Treating IPOs as a bet on market sentiments: During bull markets investors often assume that nothing could go wrong with over hyped IPOs. The Reliance Power IPO, to a good extent, dispelled this myth. However investors continue to invest in IPOs as a bet on the market sentiment. Little do they realize that sooner or later the fundamentals of the company will catch up with its valuations.
It is how you treat an IPO that will determine whether your decision on the stock is correct or not. Giving a doubtful IPO a miss can in no way reduce your chances to create long term wealth.
Do you think about the chance of losing money in an IPO while subscribing to it? Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
Use Our Secret Investment Strategy For Your Benefit...
For over seven years, our secret small cap selection strategy has helped us zero in on several high-potential small cap stocks.
And many of the small caps have gone on to deliver on their potential and beyond also...
Giving returns like 288% in two years five months, 124% and 139% both in just seven months, 250% in two years, 123% in three months, 2,263% in six years three months, 832% in five years eight months, and more.
And now, YOU too could use our secret strategy for your benefit.
Just click here for full details...
The recent IPO of InterGlobe Aviation too solicited a lot of attention due to the huge payout of dividend to promoters, which left the company's net worth in the negative.
Now, we love the companies which pay handsome dividends to shareholders. Companies with stable and growing dividends are perceived to be promising. However, what if a company pays dividends in spite of poor performance or only for the benefit of promoters?
The case of Vedanta Ltd seems very similar. The company recently, declared its quarterly results and reported sharp decline in its revenues and profits. However company announced double interim dividend from last year's dividend. It is also imperative to note, the overall financial position of the company is already quite weak. Not only that, the rating agency has also downgraded its foreign currency long-term corporate credit rating.
Further, as reported in Mint, when analysts posed the question about sources for paying substantial dividend inspite of poor performance the company mentioned the payment will be done from the dividends received from Hindustan Zinc, its subsidiary. Do note that Vedanta Ltd holds 64% share in Hindustan Zinc.
Dividend payments of this fashion seem to be quite manipulative and absurd to us. Coercing subsidiaries to shell out huge dividends to resolve the parent company's financial problems is against the interest of former's minority shareholders. Hence it will be wise for investors to assess the potential of the companies and not get swayed away by such irrational payments.
Recently, the New World Wealth released report of total individual wealth of countries across the globe. Total individual wealth refers to the private wealth held by all the individuals of each country. This includes all property, cash, equities and business interests of each individual in the country.
Today's chart of the day highlights wealth held by the individuals of the Top 20 countries. According to this report, United States topped the list with the total individual wealth of US$ 48.7 trillion, while China and Japan were on second and third position.
India ranks 10th in Total Individual Wealth Globally
India's total individual wealth stood at US$ 3.5 trillion. While India is ranked at 10th place on this parameter, the country falls to 20th place on wealth per capita basis. This was in spite of robust per capita growth. In last 15 years the per capita growth has been 211%. India's demographics and improving regulations have been important factors for this growth. Having said that, going forward India will require much stronger regulations and policies to reduce the income divide for ensuring commensurate growth in India's per capita income.
Talking about India's growth, Make in India, certainly has an important role to play. An article on Mint highlights an important challenge on this front. As per this article, given India's dominant share coming from service sector, it will be challenging for the country to shift the growth triggers from service and re-focus on manufacturing. Along with this, India needs to go long way to bring about structural reforms.
So, does that mean India cannot make headway in the evolution of indigenous manufacturing?
India's manufacturing is largely dependent on government's ability to deliver on infrastructure, labour laws, logistics and other such fronts. While, there are no quick fixes to these problems, measures taken to encourage manufacturing by simplifying bureaucratic procedures and attract foreign investments will go a long way. The government wants to remove the notorious legal and infrastructure hurdles. Serious steps in this direction could open up remarkable business opportunities. And these could be potential Megatrend which can unleash huge wealth building opportunities.
So, while challenges persist, some green shoots are already visible which could bring around vast change in the India's manufacturing Megatrend. And it is certain to impact sectors ranging from engineering to textiles to pharma, banking and retailing. A close watch on this trend is necessary to spot companies that can be the biggest wealth creators riding on India's Megatrend signals
At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 67 points. Gains were seen in metal and auto stocks while energy and pharma stocks were trading weak. The Midcap and smallcap indices were also trading marginally higher.
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher
|| Today's investing mantra
Today's Premium Edition|
Is A Revival in the Auto Industry Due?
Recovery for the Indian auto industry in the last couple of years has been slow.
| Get Access
|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407