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...
CompanyMonth of issueUpper price band Listing priceListing gainsCurrent priceLong term gain
  Rs per sharePoint to pointRs per shareCAGR (%)
UTVFeb-05130 165 26.9%680 93.8%
3i Infotech*Mar-0550 53 5.2%145 53.1%
India InfolineApr-0580 87 8.7%1,018 176.6%
Shopper's StopApr-05250 373 49.2%488 30.7%
ProvogueJun-05150 250 66.7%971 111.1%
Yes BankJun-0545 65 44.4%210 85.2%
IL&FS InvestmartJul-05125 183 46.4%187 17.5%
IDFCJul-0534 50 47.1%180 94.8%
Suzlon EnergySep-05510 640 25.5%1,780 81.3%
ABG ShipyardNov-05185 280 51.4%639 85.9%
Punj Lloyd*Dec-0514019841.4%39563.9%
Tulip IT ServicesDec-05120 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...
CompanyMonth of issuePrice Band Listing priceListing gains (%)Current priceLong term
  Rs per share Rs per sharegain (%)
Jet AirwaysFeb-05112512117.6%925-8.9%
Emami Ltd.*Mar-05 210 279 32.9%259 8.8%
Shringar CinemaApr-05 53 54 1.7%62 6.5%
Prithvi Information SolutionOct-0527032420.0%254-2.9%
Piramyd RetailNov-05140135-3.6%57-34.8%
PVR CinemaDec-0524026610.8%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

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Top 5 Stocks FIIs Bought and Sold Recently (Views On News)

Nov 25, 2021

FIIs have largely stayed on sidelines for the past few months, withdrawing money across emerging markets.

Everything to Know About the Upcoming Tega Industries IPO (Views On News)

Nov 27, 2021

Are you looking to apply for the Tega Industries IPO? You must ensure that you know specific details.

3 Charts on Why the Indian Bull Looks Tired podcast (Views On News)

Nov 27, 2021

Rahul Shah explains the key reasons behind his pessimistic outlook on the stock market.

More Views on News

Most Popular

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 26, 2021 (Close)