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IPOs: On road to recovery?

Jun 15, 2002

It has been a rough ride for both the primary and secondary markets ever since the tech meltdown, which started in early 2000. At times when markets showed some signs of consolidation they have been pulled back by some or the other events, which have shaken investor confidence to a large extent. Starting with Ketan Parekh and UTI jinx to September 11 and earthquake in Gujarat, the investor community has received continuous flow of blows. Here in this article, we take a look at the performance of the primary market, as a whole, comprising public issues, rights issues, private placements and overseas floatations in the last one year. Also, we analyse the returns Initial Public Offerings (IPOs) have generated since 1999. Have investors really made money investing in Indian stock markets over the last five years? While the answer is yes if one considers that the return is in the positive zone for a long-term investor (over the last six years around 2%), one wonders if it is enough to meet his basic needs after adjusting for inflation. Over the last five years, Sensex has given positive returns on just two occasions i.e. 1997 and 1999. Ever since the tech meltdown, investors have lost as much as 38% since January 2000.

Sensex-Periodical returns…
YearJan 1stDec 31stReturn (%)
1997 3,261 3,659 12.2%
1998 3,695 3,055 -17.3%
1999 3,060 5,006 63.6%
2000 5,375 3,972 -26.1%
2001 3,955 3,262 -17.5%
2002* 3,246 3,311 2.0%
*Till June 13th

When it comes to primary markets and the success of any given Initial Public Offering (IPOs), investor confidence is the key. In the last one year alone, i.e. January-December 2001, BSE Sensex has fallen by 17.5%. Given the fact that investors have suffered severely over the last few years, the performance of the primary market is also not much to write home about. One can count the number of companies, which have actually created wealth for investors after raising money.

Consider the performance of the primary market in the last one-year. Money raised from public issues has fallen by 51.7% to Rs 41.7 bn between Jan-Dec’00 and Jan-Dec’01. Similarly rights issue proceeds have also declined by 16.0% to Rs 10.5 bn in the same period. The only big-ticket rights issue during the year was from Tata Engineering. Cumulative funds mobilised from the primary market, including overseas issues, was lower by 46% to Rs 413.8 bn.

However, overseas floatation in the year 2000 includes, money raised by the SBI as India millennium deposit. Excluding this, total issue proceeds were down by 17%. With markets showing some signs of recovery again in 2002, is there any improvement in performance of primary market? The answer is yes and no. For the first of quarter of the current calendar year i.e. Jan-March 2002, there has been a sharp spurt in public issue proceeds by 47.7% to Rs 41.3 bn.

Primary market-Nothing to cheer…
(Rs bn)FY01FY02Change
Public issues 86.4 41.7 -51.7%
Rights issue 12.5 10.5 -16.0%
Private placement 371.2 336.3 -9.4%
Overseas floatations 301.8 25.3 -91.6%
Total 771.9 413.8 -46.4%
*January-December
Source: Compiled from CMIE

This includes IPOs from Punjab National Bank and Bharti Televentures, which together managed to raise almost Rs 12 bn. This is an encouraging signs for things to come in the coming months. Just to put things in perspective, money mobilised in the first quarter public issues alone almost equals the full year issues proceeds from the same last year. While there is action on the public issues front, it is not the case when one considers the primary market as a whole in 2002. Total money raised from primary markets was down by 16.6% between Jan-March 2002. Activity in the private placement market has remained subdued over the last year and a half on account of new regulations enacted by SEBI.

Public issues-Revitalised?
(Rs bn)Public
Issues
Rights
Issue
Private
Placement
Overseas
Floatations
Total
Jan-March'01 27.9 2.2 90.6 3.4 124.1
Jan-March'02 41.3 1.6 60.7 - 103.6
Change (%)47.7%-28.7%-32.9%-100.0%-16.6%

After having taken a closer look at the performance of the primary market, the second part of this article deals with the performance of IPOs on the bourses. We have analysed a total of 89 issues in this article and it vindicates the fact that all IPOs are not necessarily multi-baggers. Of the issues observed, there are only 18 issues that have positive returns (i.e. 20% of total IPOs reviewed). Of the top ten gainers, four are banking IPOs, which have been on the rise in recent months. There are quite a few software IPOs as well that includes the likes of Polaris and Geometric Software. Talking about the laggards, of the top ten losers, eight are tech stocks that were able to capitalize on a buoyant market during 1999-00.

Company NameOffer
Period
Offer
Price (Rs)
Current
Price (Rs)
Gain or
Loss(%)
The Toppers
Fortune Informatics Sep-99 10 69 591.5%
Balaji TelefilmsSep-00 130 535 311.5%
Polaris Software*Aug-99 105 271 158.3%
KPIT Systems Feb-99 90 190 111.5%
IDBI Bank Feb-99 18 34 88.9%
Geometric Software Solutions Feb-00 300 532 77.3%
Syndicate BankOct-99 10 17 70.5%
Padmalaya Telefilms Apr-00 100 170 69.7%
Andhra BankFeb-01 10 16 61.5%
Punjab National BankJan-02 31 49 57.1%
The Laggards
Telesys Software Feb-00 15 2 -84.0%
Integrated Hitech Dec-99 10 2 -84.5%
Online Media Jun-00 10 2 -85.0%
Softpro Systems Mar-00 85 12 -85.6%
SQL Star International Jun-99 55 8 -86.2%
Contech SoftwareMar-00 60 8 -86.3%
Avantel SoftecFeb-00 50 7 -87.0%
Sibar Media and EntertainmentJul-00 10 1 -88.5%
Vintage CardsOct-99 225 19 -91.8%
Omni Ax SoftwareApr-00 15 1 -95.7%
Simple Average 79 56 -29.5%

Given this backdrop, what can one expect from the IPO market? In the future, a number of banking companies are expected to tap the primary market for meeting the capital adequacy norms as well as for adopting new technology to remain competitive. But one has to exercise caution when it comes to banking issues. Private sector banks are at a clear advantage not only in terms of technology, but also in terms of productivity and efficiency ratios when compared to PSUs. Given the fact that spreads are narrowing, in the long run, only few banks are expected to be profitable.

One could also expect a number of telecom IPOs in the future. Post de-regulation, there has been a drastic reduction in both domestic and international long distance rates. Air time charges for cellular services are lower by atleast 60% and competition is high in the fixed line service as well. So the survivors in the long run would be those who have strong and big balance sheets.

After a certain point in time, telecom companies lose their competitive edge and the only differentiation is then lower usage charges, irrespective of the services offered. So one has to analyse how many companies actually have money to withstand such a scenario.

Like a NBFC boom in early 1990s, commodity boom in mid 1990s, technology boom in 2000, media issues in 2001, we will have a number of new booms in the future as well. Biotechnology has been hyped a lot these days. But from a retail investor’s perspective, caution is the watchword. During the tech boom in 2000, markets witnessed atleast 150 odd software companies IPOs. How many of them are still surviving? So the next time, before taking investment decisions, lets make sure that we direct our hard earned money after conducting prudent analysis.

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