Nov 27, 2003|
IPO: Should you bite the bait?
Brokers and other market players are never short of 'tips', be it a bull market or a bear market. The most popular 'tip' that is doing the round these days is, "Blindly invest in IPOs (Initial public offers) and make money". With the buoyancy seen in the stock market in the recent months, one may once again see a spurt in the number of IPOs coming to the market. But does subscribing to an IPO always guarantee returns? Let's find out.
IPOs are a means for a company to raise resources to fund its various business needs. However, it is also a very useful medium for unscrupulous promoters of fundamentally weak company rob innocent investors of their savings. To justify the above point, take a look at the following table.
Performance at glance...
||Date of listing
||Price on listing
|Indian Overea Bank
The table above indicates that in a majority of cases IPOs have been rewarding for investors. While companies with a good business models are bound to outperform, companies with a weaker business models or a poor management are unlikely to yield any return whatsoever. Bharti Tele-Ventures Limited (BTL) is one the India's leading private sector telecommunication service provider with presence in various segments of the industry. Despite incurring losses, the prospects for the industry going forward, and the purpose for which the IPO was made (raising funds for acquiring new circles) augured well for the company. Similarly, in case of i-flex, its banking product, 'FLEXCUBE' has been well received globally. This apart, the scalability of the product translated into strong business prospects for the company. Resultantly, we see that investors who subscribed to these IPOs were well rewarded for their decision.
On the other hand, investors who would have invested in the two banking IPOs (Indian Overseas bank and UCO Bank) would have seen nothing but disappointment. Indian Overseas Bank and UCO Bank both scored poorly as compared to its PSU peers on most operational parameters. This apart, both banks had also received poor reports from the Reserve Bank, thus raising questions about their credibility.
Thus, investors need to realise that, 'investing in IPOs guarantees assured returns', is only a myth. Only a fundamentally strong company with a good business model and a proactive management is likely to perform well. Investors need to hence make a detailed review of the company before applying to an IPO. The purpose for which the company is raising the funds and its cash flows should be looked into. This apart, the P/E of the company vis-à-vis its peers should be calculated before subscribing to the IPO, as it will be a good indicator for ascertaining whether the IPO is fairy priced.
In a bull market, investors will have many IPOs coming their way. In the next few months many companies including Tata Consultancy Services (TCS), Indraprastha Gas Ltd. (IGL), Biocon India, NTPC, etc are likely to venture into the primary market. Investors hence need to be choosy and undertake a thorough study before applying to an IPO. Taking the advice of experts (basically research based outfits) in the field would be definitely of help.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407