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Tale of two IPOs…

Feb 8, 2008

Or rather three. One that evoked so much fervor recently that investors stomped over one another to apply to the same. And two - the latest ones - that have been unable to find many takers despite lowering their offer prices and extending subscription dates. One out of these latest two, Wockhardt Hospitals has in fact pulled out its IPO for lack of response from applicants. The company will be refunding money in 15 days time to those who have applied to the issue. Apart from weak market sentiment, one of the key reasons for poor response to these two IPOs (the other being of real estate developer, Emaar-MGF) has been 'high valuations' - an issue that had seemingly lost its relevance just a couple of weeks back, when the going was good. Valuations were, in fact, not even talked about as investors poured in applications for getting pie of a company, which did not have even a single rupee of business earnings. Investment bankers turned sellers of dreams, prophesizing about the listing day gains of this IPO. The issue was still oversubscribed more than 70 times. And then, all fell down.

The global market turmoil, that impacted Indian stocks as well, led to the same applicants running helter skelter to issue stop payment requests to their banks for the cheques that were issued for applying to this IPO. Many succeeded and many didn't. Anyways, the company has allotted its shares and plans to list during the next week. And now, there are permutations and combinations made out for the listing price. Some commentators have even gone on to say that the listing price of this issue will determine the course of Indian stock market!

In the meanwhile, the promoters and lead managers of the second ongoing IPO - Emaar-MGF - have extended the issue closing date by four more days after having revised the offer price band two times. While the issue might not receive any meaningful amount of incremental subscription over these four days, the issues with respect to overpriced IPOs and overpaid investment bankers a.k.a. dream sellers have reared their heads again. And it is good for retail investors, considering that this bunch has been taken for a ride time and again in the past.

The concerns surrounding the secondary markets might fade away, and the heydays of overpriced IPOs might come again, but it is for you, the retail investor, to have a proper understanding of the risks that you are taking while investing in the same (IPOs or listed stocks). It is pertinent for you to carefully analyse -

  • the business of the company and its past performance (if it exists!)

  • its promoters and their experience (and how have they treated minority investors in the past),

  • the objects of the issue (where will the IPO money get invested and the expected returns on the same),

  • the pricing of the issue (by comparing it with valuations of the company's peers) - do not go by the prospectus as far as competitors' valuations are concerned; do an independent analysis.

"Caveat emptor - buyer beware" This should be the watchword for investors. Any company may opt for an IPO. But, ultimately it is your hard-earned money that could get diverted into unproductive investments, which may not give you the required returns in the long run.

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