IPOs: 'Long-term' holds true! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

IPOs: 'Long-term' holds true!

Oct 18, 2007

With the foreign investors injecting hundreds of billions of dollars into the Indian markets, the benchmark indices had been left with no time to even catch up their breath during the marathon run on the bourses over the past few weeks. While making new records are the order of the day and invariably catch the fancy of the pink papers, retail investors are left wondering whether they have missed the bus or are losing out by not riding on the short-term momentum. Among the many records created by the Indian stock markets during the year so far, the lead contributors were the Initial Public Offerings (IPOs). It was a record as the Indian capital markets saw over Rs 250 bn being raised from the primary market, the highest ever. This achievement gets further magnified when compared to the fact that this amount was almost 11 times higher than that of 2003 (Rs 22 bn) and just a tad lower to the near Rs 320 bn raised by IPOs in the period 1995-2003 i.e. 9 years!

With the markets having been in a jubilant mood since the last couple of months, one of the key reasons why the IPO activity has heightened significantly in recent times is the investors' anticipation of short-term supernormal returns in IPOs. It must be noted that during such times, an unlisted company is not only able to realise a good valuation for its offering but would also be rather sure that its issue would be 'over-subscribed' considering the high appetite amongst investors - both domestic and foreign - to invest in equities. However, what is more pertinent to keep in mind is that stocks with strong fundamentals have the potential to deliver superior returns over a longer time frame as compared to the listing gains.

We have so far been advising investors to invest with a long term and stock specific approach and stick to the fundamentals irrespective of the shot term sanguinity or mayhem. This principle applies to primary market issuances (IPOs) as much as it does to the secondary market. And, if one is to judge the two-year performance of the IPOs of 2005, it only manifests our view!

The ones that delivered...
Company Month of issue Upper price band Listing price Listing gains Current price Long term gain
    Rs per share Point to point Rs per share CAGR (%)
UTV Feb-05 130 165 26.9% 680 93.8%
3i Infotech* Mar-05 50 53 5.2% 145 53.1%
India Infoline Apr-05 80 87 8.7% 1,018 176.6%
Shopper's Stop Apr-05 250 373 49.2% 488 30.7%
Provogue Jun-05 150 250 66.7% 971 111.1%
Yes Bank Jun-05 45 65 44.4% 210 85.2%
IL&FS Investmart Jul-05 125 183 46.4% 187 17.5%
IDFC Jul-05 34 50 47.1% 180 94.8%
Suzlon Energy Sep-05 510 640 25.5% 1,780 81.3%
ABG Shipyard Nov-05 185 280 51.4% 639 85.9%
Punj Lloyd* Dec-05 140 198 41.4% 395 63.9%
Tulip IT Services Dec-05 120 180 50.0% 825 175.8%
*Prices adjusted for bonus, stock split, mergers
Prices as on 13th October 2007

With the kind of gains most of these IPOs have returned, investors seemingly have a good enough reason to invest in the upcoming IPOs. However, before jumping to any conclusion it is worthwhile to remember that in a little over a decade, as per the numbers available from the Ministry of Company Affairs website, 114 companies have vanished after raising money from equity markets! The aggregate size of all these issues combined stand at approximately Rs 7.9 bn! What also proves our point is the fact that even the IPOs that delivered 'listing gains' to investors in 2005, grossly lagged behind and proved to be the sour grapes in the longer term.

The ones that failed...
Company Month of issue Price Band Listing price Listing gains (%) Current price Long term
    Rs per share   Rs per share gain (%)
Jet Airways Feb-05 1125 1211 7.6% 925 -8.9%
Emami Ltd.* Mar-05 210 279 32.9% 259 8.8%
Shringar Cinema Apr-05 53 54 1.7% 62 6.5%
Prithvi Information Solution Oct-05 270 324 20.0% 254 -2.9%
Piramyd Retail Nov-05 140 135 -3.6% 57 -34.8%
PVR Cinema Dec-05 240 266 10.8% 199 -8.5%
*Prices adjusted for bonus, stock split, mergers
Prices as on 13th October 2007

Thus, all the factors that are considered while investing in an already listed company would be applicable while choosing to invest in an IPO. In fact, much more caution is advised in IPOs considering the fact that most of them do not provide their financial history beyond what is made mandatory by the regulators. And as such, investors must do their homework and bear in mind certain key parameters while investing in an IPO.

To conclude, while an investor would always get lured by the astounding returns IPOs have offered in the recent past, our stand is to invest in an IPO only if the business model, prospects and valuations justify the price, and not just because it is an 'IPO'. It is apt to bring out at this point what the legendary investor, Warren Buffet, believes, "...we miss a lot of very big winners but it also means we have very few big losers.... We are perfectly willing to trade away a 'big' payoff for a 'certain' payoff."

Equitymaster requests your view! Post a comment on "IPOs: 'Long-term' holds true!". Click here!


More Views on News

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

ICICI Prudential ESG Fund: Aims for Sustainability (Outside View)

Sep 24, 2020

PersonalFN briefly explains the newly launched fund : ICICI Prudential ESG Fund.

What to Do if there is a Second Wave of the Stock Market Crash (Profit Hunter)

Sep 24, 2020

Here's what I think investors should do in this selloff.

IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea? (Outside View)

Sep 23, 2020

IDFC Mutual Fund is taking the road less travelled and hence started a campaign SIFI (SIP in Fixed Income) to promote the concept of SIP for its debt funds investors.

My View on the IPO Market (Fast Profits Daily)

Sep 23, 2020

In this video, I'll share with you my thoughts on the recent spate of IPOs and what it means for the market.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 02:36 PM