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IPO: An investing challenge - Views on News from Equitymaster
 
 
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  • Apr 5, 2003

    IPO: An investing challenge

    The sad story of the Indian primary and secondary markets continues. Unprecedented events have taken a toll on sentiment towards the equity markets and consequently, IPOs have dried up. We take a look at the IPO scene in the last couple of years, and get a feel of what lies ahead.

    The erosion of funds raised
    (Rs m) FY02* FY03* % Change
    Public issues 19,715 1,443 -92.7%
    Rights issues 499 493 -1.2%
    Domestic floatations 49,709 18,876 -62.0%
    Overseas floatations 701 - -100.0%
    PPL 29,495 16,940 -42.6%
    Total floatations 50,410 18,876 -62.6%
    Total funds raised 100,119 37,752 -62.3%
    * Represents February year ending

    The last 12 months have seen a significant fall in the funds raised from capital markets through public issues, rights issue, domestic and overseas floatations. In FY02 (Feb 2001 – Feb 2002) total funds raised from the capital markets stood at Rs 100 bn. However, this figure dwindled to Rs 38 bn in FY03 (Feb 2002 – Feb 2003), a sharp 62% fall. If one were to further break it up, then public issues have actually dipped by 92% YoY.

    Top 10 Gainers
    Company Name Offer period Offer price CMP* % Change
    Fortune Informatics Ltd Sep-99 10 48.2 381.5%
    Punjab National Bank Mar-02 31 102.9 231.9%
    Moschip Semiconductor Technology Ltd Dec-00 10 29.1 191.0%
    Andhra Bank Feb-01 10 26.3 162.5%
    Infobahn Technologies Ltd Mar-00 10 23.8 137.5%
    Canara Bank Nov-02 35 67.8 93.7%
    I-Flex Solutions Ltd Jun-02 530 911.2 71.9%
    Syndicate Bank Oct-99 10 16.4 64.0%
    Geometric Software Solutions Company Ltd Feb-00 300 484.6 61.5%
    Divi's Laboratories Ltd Feb-03 130 207.9 59.9%

    It is not as if the IPOs didn’t make money for the investor. Infact, recent banking IPOs like Punjab National Bank, Andhra Bank, Canara Bank and Syndicate Bank, are among the top performers for investors. Improving environment for the sector in terms of clear government policy gave a fillip to the sentiment towards this sector. Recent passing of the Securitisation Bill as well as budget measures like the hike in FDI limits to 74% from the earlier 49% for private banking majors has peppered stock prices of these IPOs to new highs.

    Top 10 losers
    Company Name Offer period Offer price CMP* % Change
    Integrated Hitech Ltd Dec-99 10 0.6 -94.0%
    IQMS Software Ltd Oct-00 10 0.6 -94.0%
    Sibar Media & Entertainment Ltd Jul-00 10 0.5 -95.0%
    e.star Infotech Ltd Feb-01 10 0.5 -95.5%
    GDR Software Ltd Apr-00 10 0.5 -95.5%
    Shree Rama Multi-Tech Ltd Jan-00 120 4.8 -96.0%
    Omni Ax's Software Ltd Apr-00 15 0.5 -96.7%
    Fourth Generation Information Systems Ltd Nov-00 10 0.3 -97.0%
    Vision Organics Ltd Oct-00 40 0.8 -98.1%
    Dynacons Systems & Solutions Ltd Jul-00 30 0.3 -99.0%
    * price as on 28/03/03

    Post the tech bust the top losers have been tech IPOs. Quite a few companies, which got listed during the boom period, have either gone into oblivion, which means that they went bust or have seen significant erosion of their respective market caps. Some of the examples are Integrated Hitech Ltd., Shree Rama Multi-Tech Ltd., e.star Infotech Ltd. and IQMS Software Ltd. Investors just went after the IPOs that had a prefix or a suffix remotely connected to tech or software. During the boom, a lot of companies knowingly changed their names to give an impression of being a tech company. And as happens after every wild boom, reality struck and most of the shady IPOs got hammered to reflect their true values. So some vanished overnight and some are trading at a fraction of their original IPO price. Of course, there was a high profile listing of the banking product major, i-flex Solutions, which has given investors decent returns till date. Bharti Teleservices was another big IPO, though not as lucrative as yet. But such issues were too few and far between.

    This prompted the SEBI to issue new guidelines for the companies wanting to get listed on the stock exchanges. It required that the potential listing company should have a clean financial track record and secondly, it should have paid minimum three years of dividends prior to the listing. Also, the promoters now are required to have a three-year lock in period in the company’s equity, thus insuring that there is no highway robbery of the retail investor’s hard earned money.

    After the lull, FY04 could bring smiles to the IPO market. The current year could probably see the mother of all IPOs, i.e., the much-awaited Tata Consultancy Services (TCS) IPO. The company is expected to offer 10% of its total equity to the public. The issue size is likely to be in the range of a huge Rs 30-40 bn. The company is the largest software exporter from India and in order to seal its authority in the software market the company has indicated that post listing it would be looking to merge 4 of its subsidiaries with itself, which include Tata Elxsi, Tata Infotech, CMC Ltd and Tata Technologies (unlisted), thus adding more muscle to its market leadership.

    That is not all. FY04 could also be witness to the debut of India’s largest passenger car company, Maruti Udyog, on the Indian bourses. The auto major is expected to raise Rs 8 bn by divesting 25% of the government’s stake in the company. However, given the government’s stand on the divestment issue, this sell off could take some time.

    After all the booms (Tech, media and telecom) now the next probable boom could be in for banking companies. Reports suggest that PSU banks could be eyeing the primary market in order to increase their capital adequacy after seeing the success other listed banking stocks have had on the bourses. The new entrants could be Indian Bank and UCO Bank among other PSU banks.

    All in all, FY04 offers a better perspective and does have a good chance of turning around the IPO sentiment. If this happens, one should really do their homework on the company’s looking for money in the IPO markets. Promoter background is of utmost importance. Then do look into the business profile of the company and find out what it intends to do with the IPO proceeds. Also, analyse the financial viability of the project and see whether the IPO is fairly priced or not. After all, even if the issue is good and the price is not fair, one can always buy into it in the secondary market.

    One of the biggest challenges facing the IPO market is the falling interest rate scenario. A few years back, corporates could access the debt market only at 15%-20% interest rates. However, owing to the soft interest rate regime, corporates can access funds at even 6%-9%. This has made the debt market more attractive to corporates than a few years back. So, it is doubly important to keep the IPO market vibrant so that corporates continue to view it as a viable fund-sourcing avenue. But this is only possible with continued investor interest, which can only come in if the IPO issues that hit the market bring strong business profiles for investors to choose from. This is where the regulator’s eyes are needed.

    Whatever SEBI does or does not do, investors while entering the market (both IPOs and secondary) should keep their own eyes open and be prudent. After all, it is your money on the line, not SEBI’s or anybody else’s.

     

     

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