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IPOs: Caveat emptor - Views on News from Equitymaster
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  • Aug 28, 2003

    IPOs: Caveat emptor

    The stock markets have had an excellent run off late. Even the recent bomb explosions in Mumbai could not dampen market sentiments for long. In the primary market as well, the recent success of Maruti has encouraged many in the industry to consider this route. Thus we have TCS (at a later stage), UCO Bank and Indian Overseas Bank among others lining up to make their initial public offerings. Many investors who had missed the bus (or should we say 'car') are now eagerly waiting for the next IPO. However, will the Maruti success story repeat itself?

    To answer the above question, we have seen the performance of some of the companies listed in the past. First the rosy picture. Take a look at the following table.

    The winners...
    Company Name Offer
    price (Rs)
    price (Rs)
    Divi's Laboratories Limited Feb-03 140 670 379%
    I-Flex Solutions  Limited Jun-02 530 1207 128%
    Maruti Udyog Ltd Jun-03 125 234 87%
    Bharati Tele Ventures Limited Feb-02 45 66 47%

    The above table will induce anyone in to subscribing to the next IPO that hits the market. A close look at the companies included in the list indicates that most of them have strong business models and focused managements. i-flex has one of the largest selling banking software 'Flexcube'. Maruti is the largest car manufacturer in the domestic market and Bharti Tele Ventures is the largest mobile telephony services provider with a pan India presence. More importantly these companies have a visible track record. While the management quality would not be known to the retail investor immediately, the performance of these companies over a period of time signals its (management's) ability to deliver.

    The losers...
    Company Name Offer
    price (Rs)
    price (Rs)
    Shree Rama Multi Tech Limited Jan-00 120 10 -92%
    MRO TEK Limited Sep-00 95 14 -85%
    Pritish Nandy Communications
    Sep-00 155 29 -82%
    D-Link (India) Limited Feb-01 300 81 -73%
    Creative Eye Limited Nov-00 50 15 -71%
    HCL Technologies Limited Nov-99 580 174 -70%
    Mid-Day Multimedia Limited Feb-01 70 22 -69%
    AZTEC Software &
    Technology Services Limited
    Oct-00 80 29 -64%

    While most stocks in the earlier table were fundamentally strong with good business prospects, majority of the stocks in the table above more than justify their position in the same. How many of us have heard about Shree Rama Multi Tech, MRO TEK or AZTEC Software? Not many, infact no one other than those who might have invested in these stocks. These are companies that were started with the basic intention of cashing in on the IPO boom that had hit the market during 2000.

    While HCL Tech has performed well over the years, the company's inability to weather the global tech slowdown successfully has soured investor sentiments. Also its acquisitions in the recent past have increased the risk profile of the stock further. An investor who would have invested in these stocks would have lost not only his money but also his faith in the stock markets.

    Thus, what does an investor do? There are a few key aspects that the investors need to look into before making an investment in an IPO. The most important being the management of the company, its qualification, experience in the industry and whether it has the 'right people at the right place' to mange the business. Another important aspect that needs to be considered is the business model of the company and the prospects of the industry in which it operates. He must also ascertain the purpose, for which the company is making the IPO, i.e., 'Where the money collected is going to be invested'. Finally, the company's valuations relative to its peers to get a rough idea regarding the nature of pricing of the IPO, i.e. whether it is overpriced or otherwise.

    In short, what the investor needs to do is look at the fundamentals of the company. The success stories that one might have heard from his friends who had subscribed to the Maruti IPO and made money must not blur his thought process. As could be seen from the above tables, a little caution could reap rich returns for the investor.



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