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2010: The year of IPOs?
Wed, 6 Oct Pre-Open

The government's disinvestment plans that were supposed to lead the tally of capital market issues this year were non events so far. But 2010 may yet be remembered as a year of record issuances in the primary markets. Buoyancy across sectors and market caps has led promoters of several small and midsized companies to cash in their stakes. And investors in the IPOs too have had more winners than losers in the short term. Out of the 38 stocks that debuted on the bourses in 2010, 18 have locked in gains in the range of 20% to 233% till date. Does that mean not investing in any IPO has been a retail investor's biggest mistake this year? We certainly do not think so. On the contrary we believe that these are times to be more cautious than ever.

FIIs with their US$ 20 bn of investments have been key contributors to supply of funds in Indian stock markets this year. The euphoria about foreign investors lining up to buy more Indian stocks has never been a long lasting one. We find no reason to believe that it is going to be any different this time.

In 2010 so far Indian corporates have raised over Rs 500 bn through domestic issues. This is close to the amount raised in the whole of 2007. In fact the oversubscription levels for recent IPOs suggest that appetite for such issues is a lot higher. To put things in perspective, according to Prime Database, September saw IPOs worth Rs 34 bn attracting subscription of Rs 370 bn from investors.

And the pipeline is far from drying up. The government's US$ 10 bn disinvestment programme has a lot of ground to cover up. Coal India's IPO targeting to raise Rs 160 bn is slated to be the biggest ever public issue in the country till date. Including this 90 companies are waiting in the wings with their offerings. They are expected to raise around Rs 770 bn from the primary market. Coal India's issue in October or November will make the total mobilization that month higher than that during the whole of 2009.

Unfortunately, in terms of fundamentals not many of the issues inspire much confidence. Infact like most times of euphoria, this time too most lure investors by way of evasive listing gains, if any. Nonetheless, investors continue to have the impression that an IPO allotment is like winning a lottery. Without doubt some IPos in the past have been in this category. There have been ones that have created plenty of investor wealth over the years. But none of those were without sound fundamentals and at unreasonable prices.

It may help to know that some great investors, including Warren Buffett, do not touch IPOs. They look for years of listing and financial compliance before buying a business. In fact Buffet's logic of not jumping in to subscribe to IPOs is the most convincing one we have come across. "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

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