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IPOs: Plummeting returns - Views on News from Equitymaster
 
 
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  • Oct 23, 2001

    IPOs: Plummeting returns

    With the sentiment in the markets at its lowest ebb, the primary market has remained lull for the most part of the year. To put things in perspective, total money mobilised via public issues has fallen by 47.4% to Rs 81 bn for the financial year ended March 31, 2001. Money raised via public issues as a percentage of total money mobilised from the primary market has come down from as high as 24.4% in FY00 to 10.9% in FY01 (IPOs: A year of misfortunes). Lots of factors punctuated the downfall. The benchmark BSE Index has showed a 36% fall in the last twelve months punctuated by various factors. A slowdown in the economy due to lower agricultural output in FY01 and the tech meltdown subdued sentiment in the markets.

    Given this backdrop, we analyse the performance of the companies that hit the markets over the last two years. And the results are not surprising at all! The flavour of the ‘most-recently-ended’ IPO season was software stocks. But after more than a year and a half of the tech collapse, valuations have plummeted to new lows, consequently eroding billions in market capitalisation and investors’ wealth.

    Not much has changed since we prepared the previous report except that the average returns on IPOs have plummeted even further. Let’s take a sectoral view of the IPO performance over the last few months.

    Company Name Offer
    Period
    Offer
    Price (Rs)
    Current
    Price (Rs)
    Gain or
    Loss(%)
    The Toppers
    Vision Organics Sep-00 40 112 180.9%
    Sankhya Infotech Mar-00 10 28 176.5%
    Balaji Telefilms Sep-00 130 241 85.6%
    Mega Channel Computers May-00 18 33 80.6%
    Lanco Global Jul-00 10 18 80.0%
    Infobahn Technologies Apr-00 10 14 37.0%
    Zenith Global Apr-00 10 13 33.0%
    Space Computers Apr-00 20 25 25.0%
    Aksh Optifibre Jul-00 60 69 15.8%
    The Laggards
    Kirloskar Multimedia Jun-00 10 1 -89.0%
    GDR Software Apr-00 10 1 -90.0%
    Irmac Services May-00 30 3 -90.0%
    Sibar Media and Entertainment Jul-00 10 1 -91.0%
    Cinevista Communication Feb-00 300 27 -91.1%
    Softpro Systems Mar-00 85 7 -91.8%
    Telesys Software Feb-00 15 1 -92.0%
    Vintage Cards and Creations Oct-99 225 13 -94.1%
    Omni Ax Software Apr-00 15 1 -95.7%
    Simple Average   61 25 -58.7%

    The successive milestones achieved by some of the top rung pharma majors like Dr. Reddy’s, Ranbaxy and Cipla in recent months seem to have enthused bourses. Almost all the pharma IPOs like Elder Pharma, Ajanta Pharma and Cadila Healthcare have rebounded in the last few months. Nevertheless, the average return is still in the negative territory.

    Some of the software IPOs, which received an overwhelming response from investors during the tech boom, likes Geometric, Hughes Software, HCL Technologies Subex Systems, and Polaris Software are also trading at a significant discount to the issue prices. Geometric Software, for instance, is currently trading at Rs 84, at a discount of 72% to the issue price of Rs 300 per share. Hughes Software is also trading at a 42% discount to the issue price of Rs 315 (split adjusted). A comparatively better performer is Polaris Software, which is trading at Rs 97 (a discount of 8%).

    The scenario is even worse for select regional software companies, which were listed in Bangalore and Hyderabad stock exchanges. These are hardly traded now. Some of the companies like Baron InfoTech and Contech Software have been barred from trading due to non-compliance with the listing regulation of the Bombay Stock Exchange.

    The banking and financial institutions have also been in the center of activity. Progressive reduction in interest rates and CRR effected by the RBI and restructuring initiatives led by a slew of voluntary retirement scheme announcements set the ball rolling in these counters. Barring IDBI Bank, all the other banking and financial institutions are trading at a notable discount to the offer price. Despite restructuring initiatives, slower credit growth, worrying capital adequacy standards, non-performing assets, and most importantly, consolidation in the banking sector has clearly drawn a line between the top rung and the second rung banking and finance companies.

    The banking lot…
    Company Offer
    Price (Rs)
    Current
    Price (Rs)
    Gain or
    Loss (%)
    IDBI Bank 18 17 -4%
    Syndicate Bank 10 9 -11%
    Indian Overseas Bank 10 8 -21%
    Centurion Bank 10 7 -27%
    Vijaya Bank 10 7 -31%
    ICICI 73 48 -34%
    PNB Gilts 30 16 -45%
    Simple Average 23 16 -29.8%

    If one were to look on the gainers side, Balaji Telefilms and Aksh Optifibre are the notable gainers. Both the companies are trading at a premium of 86% and 16% to the offer price of Rs 130 and Rs 60 respectively. However, Aksh Optifibre has seen a considerable decline from its highs earlier this year.

    Barring Balaji Telefilms, other media IPOs like Tips Industries, Tabassum International, Cinevista Communications and TV-18 are trading at a significant discount to the issue price. Against the average issue price of Rs 158, media companies are trading at Rs 53 i.e. 62% erosion in value of investments. Excluding Telephoto, almost all the media IPOs were offered at an average P/E multiple of 40x earnings thus taking advantage of the hype created during the time.

    Media: The horror story…
    Company Offer
    Price (Rs)
    Current
    Price (Rs)
    Gain or
    Loss (%)
    Balaji Telefilms 130 241 85.6%
    Padmalaya Telefilms 100 61 -39.4%
    Mukta Arts 150 67 -55.3%
    Mid-Day Multimedia 55 23 -58.5%
    Adlabs Films 120 41 -65.5%
    Television Eighteen 180 57 -68.1%
    Telephoto Entertainment 10 3 -71.0%
    Tabassum International 10 2 -83.0%
    Pritish Nandy Communications 150 20 -86.7%
    Tips Industries Limited 325 43 -86.9%
    Cinevista Communication 300 27 -91.1%
    Simple Average 139 53 -61.8%

    The performance of the IPOs on the bourses clearly sends across a strong message to the investor community. All that glitters is not gold. Time and again, investors have been lured into the trap of flavour of the season (in the early 1990s, it was the financial institutions and NBFCs). As the markets rebound, IPO market is likely to see a revival in action. This time too, we can only hope that investors are more prudent while investing (Read our checklist for IPOs).

     

     

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