Three out of every 10 stocks that were listed on Indian bourses this year returned more than 100% to investors. And three lost money for investors. Five returned more than the benchmark index of the Bombay Stock Exchange, which gained 36.9%, an indication, according to one analyst, of the hype-induced demand for these stocks.
Overall, 102 firms made their debut on the bourses this year between January and 20 December, raising Rs32,816.50 crore through initial public offerings, or IPOs.
“This year saw too much of foreign funds coming into India and artificial demand was also created in the market by the hype during the book-building process of new issues,” said Deven Choksey, managing director, KR Choksey Shares and Securities Ltd, a domestic brokerage.
Under the book-building process, investors bid for the price they are willing to pay for a stock, within a prescribed band. The offer price is fixed based on the response of investors. With the exception of a few issues, almost all IPOs were subscribed many times over, and the offer price fixed at the upper end of the band.
Foreign institutional investors (FIIs) have so far invested $16.4 billion in Indian equities this year, after investing $7.9 billion last year.
Mumbai-based Orbit Corp. Ltd tops the list of stocks that listed in 2007 in terms of performance, with returns of 645%. Shares of the construction firm, which listed at Rs90 in April, around a 18% discount to the issue price of Rs110, closed at Rs819.60 on Wednesday. Three stocks this year have returned more than 400% returns: Allied Computers International (Asia) Ltd (489.5%), Everonn Systems India Ltd (443.4%) and MIC Electronics Ltd (429.9%).
All returns were calculated on the basis of the offer price and the closing price of shares of the firms on Wednesday. For some stocks, this means the returns were calculated over a period of several months; for others, it means over a period of a few weeks. Two stocks returned between 300% and 400%, four between 200% and 300% and 20 between 100% and less than 200%.
An investment banker, who did not wish to be identified, said bankers managing IPOs were being extra cautious while pricing issues and discovering the real worth of the stocks in the secondary market after their listing. “While deciding on the offer price, lead managers are giving discounts to ensure the issues are sold. After they are listed, the stock finds its own price.”
The response to IPOs bears this out. While Orbit’s IPO was subscribed only 3.85 times, the Allied Computers issue was subscribed more than 30 times, and the Everonn Computers issue more than 131 times.
“At present, IPOs are a lottery and it’s all about getting allotment. These stocks are giving high returns since they were under-priced,” said Prithvi Haldea, chairman and managing director, Praxis Consulting & Information Services Pvt. Ltd, which puts out Prime Database, a primary market tracker. According to him, large institutional buying—between 50% and 60% of any public issue—also contributes to the rise in prices of freshly listed stocks. “In the past, the issues were sold mostly to retail investors. Institutional investors can easily exert pressure on the pricing,” Haldea said.
When a firm offers 10% of its equity to the public, 30% of the offer is reserved for retail investors, 10% for high net worth individuals and the rest for institutional investors. For lar-ger public floats, where a firm offers 25% of its equity, the po-rtion reserved for retail investors goes up to 35% and that reserved for high net worth individuals and institutions is 15% and 50%, respectively. In both cases, institutions are allowed to buy leftover shares in the other categories.
The Sensex returned around 46% last year, but corresponding returns from IPOs were muted. Only 23 stocks, out of the 95 that listed in 2006, returned more than the benchmark index. And only one in every nine stocks returned more than 100%. More than 45% of the stocks that listed in 2006 lost money for investors.
In contrast, fewer stocks have disappointed investors this year. Thirty-one of the 102 IPOs this year have given negative returns. The worst of the lot is House of Pearl Fashions Ltd. Priced at Rs550, it listed on bourses in February at a 10% discount and closed on Wednesday at Rs262.05, down more than 52% from its offer price. Broadcast Initiatives Ltd, that started trading in March, has also seen its value erode by more than 50% from its offer price.
While some investors buy IPOs with the sole intention of selling the stock on the day it lists, there are a few who invest in IPOs for the long term.
“Any IPO is great news for small investors like me but the problem is getting allotment of shares in a primary issue. Since there is always oversubscription, it is becoming increasingly difficult to get shares. As we get very few shares, the funds get locked till the listing date and I cannot invest in other stocks,” said Vishal Thakkar, an accountant in a multinational firm, who has been investing in IPOs for years now.
Analysts are bullish on the prospect for firms that plan to list in 2008, but with a few caveats. “The primary market will boom as long as there is a stable and buoyant secondary market,” Haldea said.
Krishna Kumar Karwa, managing director, Emkay Share & Stockbrokers Ltd, said newly listed firms would continue to give good returns as long as FIIs continued to invest in the country.
Overall, 102 firms made their debut on the bourses this year between January and 20 December, raising Rs32,816.50 crore through initial public offerings, or IPOs.
“This year saw too much of foreign funds coming into India and artificial demand was also created in the market by the hype during the book-building process of new issues,” said Deven Choksey, managing director, KR Choksey Shares and Securities Ltd, a domestic brokerage.
Under the book-building process, investors bid for the price they are willing to pay for a stock, within a prescribed band. The offer price is fixed based on the response of investors. With the exception of a few issues, almost all IPOs were subscribed many times over, and the offer price fixed at the upper end of the band.
Foreign institutional investors (FIIs) have so far invested $16.4 billion in Indian equities this year, after investing $7.9 billion last year.
Mumbai-based Orbit Corp. Ltd tops the list of stocks that listed in 2007 in terms of performance, with returns of 645%. Shares of the construction firm, which listed at Rs90 in April, around a 18% discount to the issue price of Rs110, closed at Rs819.60 on Wednesday. Three stocks this year have returned more than 400% returns: Allied Computers International (Asia) Ltd (489.5%), Everonn Systems India Ltd (443.4%) and MIC Electronics Ltd (429.9%).
All returns were calculated on the basis of the offer price and the closing price of shares of the firms on Wednesday. For some stocks, this means the returns were calculated over a period of several months; for others, it means over a period of a few weeks. Two stocks returned between 300% and 400%, four between 200% and 300% and 20 between 100% and less than 200%.
An investment banker, who did not wish to be identified, said bankers managing IPOs were being extra cautious while pricing issues and discovering the real worth of the stocks in the secondary market after their listing. “While deciding on the offer price, lead managers are giving discounts to ensure the issues are sold. After they are listed, the stock finds its own price.”
The response to IPOs bears this out. While Orbit’s IPO was subscribed only 3.85 times, the Allied Computers issue was subscribed more than 30 times, and the Everonn Computers issue more than 131 times.
“At present, IPOs are a lottery and it’s all about getting allotment. These stocks are giving high returns since they were under-priced,” said Prithvi Haldea, chairman and managing director, Praxis Consulting & Information Services Pvt. Ltd, which puts out Prime Database, a primary market tracker. According to him, large institutional buying—between 50% and 60% of any public issue—also contributes to the rise in prices of freshly listed stocks. “In the past, the issues were sold mostly to retail investors. Institutional investors can easily exert pressure on the pricing,” Haldea said.
When a firm offers 10% of its equity to the public, 30% of the offer is reserved for retail investors, 10% for high net worth individuals and the rest for institutional investors. For lar-ger public floats, where a firm offers 25% of its equity, the po-rtion reserved for retail investors goes up to 35% and that reserved for high net worth individuals and institutions is 15% and 50%, respectively. In both cases, institutions are allowed to buy leftover shares in the other categories.
The Sensex returned around 46% last year, but corresponding returns from IPOs were muted. Only 23 stocks, out of the 95 that listed in 2006, returned more than the benchmark index. And only one in every nine stocks returned more than 100%. More than 45% of the stocks that listed in 2006 lost money for investors.
In contrast, fewer stocks have disappointed investors this year. Thirty-one of the 102 IPOs this year have given negative returns. The worst of the lot is House of Pearl Fashions Ltd. Priced at Rs550, it listed on bourses in February at a 10% discount and closed on Wednesday at Rs262.05, down more than 52% from its offer price. Broadcast Initiatives Ltd, that started trading in March, has also seen its value erode by more than 50% from its offer price.
While some investors buy IPOs with the sole intention of selling the stock on the day it lists, there are a few who invest in IPOs for the long term.
“Any IPO is great news for small investors like me but the problem is getting allotment of shares in a primary issue. Since there is always oversubscription, it is becoming increasingly difficult to get shares. As we get very few shares, the funds get locked till the listing date and I cannot invest in other stocks,” said Vishal Thakkar, an accountant in a multinational firm, who has been investing in IPOs for years now.
Analysts are bullish on the prospect for firms that plan to list in 2008, but with a few caveats. “The primary market will boom as long as there is a stable and buoyant secondary market,” Haldea said.
Krishna Kumar Karwa, managing director, Emkay Share & Stockbrokers Ltd, said newly listed firms would continue to give good returns as long as FIIs continued to invest in the country.
