The week gone by saw the Indian markets feel the heat of profit booking. This was largely attributed to investors - domestic and foreign - booking profits to keep aside cash for subscribing to the IPO of Coal India Ltd. (CIL), which opens today.
A lot of hype surrounds the CIL IPO, which replaces Reliance Power as the biggest ever Indian IPO. Investment bankers and brokers are falling over each other to offer reasons why they believe this IPO will be a game changer for the Indian markets. In short, huge expectations have been built around this IPO, which can turn out to be dangerous if the company were to fail to delver of these expectations in the future. We saw what happened to a recent IPO of a microfinance major and how investors rushed to the exits as soon as bad news flew out of the company's doors.
We last saw such hype around an IPO way back in January 2008. But then the company offering its shares had nothing more to show to investors than a business plan. CIL, on the other hand, is a well-established company and a near monopoly in its own right. But even that does not mean that you go all out and apply to the IPO as if there's no tomorrow.
Given the kind of euphoria that surrounds this IPO, there are big chances that the listing gains can be good (also as promised by its chairman recently!). But we believe that you must not apply to an IPO, like you must never buy a stock, just speculating on short term returns. It is important to study the company well before you apply to its shares. And CIL, despite its size, government backing and, long history, is no exception.
After all, weighing the evidences objectively, intelligent investors should conclude that IPO does not stand only for 'initial public offering'. As per the father of value investing, Benjamin Graham, an IPO is more accurately shorthand for - 'It's Probably Overpriced', or 'Imaginary Profits Only', or even 'Insiders' Private Opportunity'.