Saturday, 22 March, 2008

IPOs - not profitable always

Investors who subscribed to the initial public offer, in the first quarter of 2006, of shares by Sadbhav Engineering are a fortunate lot. Against an investment of Rs 185, the stock closed at Rs 1,080 on Wednesday, an appreciation of more than five-fold in the space of just two years.

So, is investing in initial public offerings (IPO) a safe bet? The answer is no, if we go by the performance of the IPOs of the last two years. Actually there is one in two chance that you wouldn’t have made any money at all. According to data available on NSE Web site, around 181 companies had come out with IPOs to raise money since the commencement of the bull-run that began in early 2006. Of these, about 50 per cent – 92 stocks to be precise – are quoting below the issue price. Seventy companies approached the market for funds in 2006. The number increased to 89 in 2007 and it is 13 in the year to date.

IPOs have been punished across sectors and irrespective of the subscription levels. For instance, shares of companies as diverse as Reliance Power, Future Capital, MindTree Consulting and Sobha Developers which had evoked strong response from investors at the time of initial placement are currently ruling below their issue prices. Even ICICI Bank which came out with a follow-on public issue at Rs 940 is currently quoting well below that price.

A Mumbai-based broker said: “When a stock first starts trading, its price moves up to higher level on pent-up demand. Investor demand is often unusually heavy due to the hype surrounding an IPO, particularly for high-profile companies.”

But even among those that did not evoke a frenzy in the run-up to the IPO on the scale of Reliance Power, there have been significant losers. Uttam Sugar Mills (81 per cent), Broadcast Initiatives (80 per cent) and Raj Rayon (79 per cent) are some of the companies that registered major losses.

For investors, the sentiment had turned so adverse in recent times towards any fresh commitment that many companies were forced to withdraw their IPO plans. Among the few that postponed their plans for mobilisation of capital from the public included such high-profile issues as Emaar MGF and Wockhardt Hospitals.

But there have been a few notable exceptions among the IPO stocks besides Sadbhav Engineering that have emerged unscathed despite the Sensex losing 6,000 points in just two months. Though they have declined from their peaks, are still quoting higher than the offer price even while the market has been under a strong bear hug. MIC Electronics is one such. As against the issue price of Rs 150, the share closed at Rs 703.7 on Wednesday, a return of 369 per cent over cost.

According to analysts, investing in IPOs is also as risky as investing in secondary markets. Investors must go beyond the allure and hype of IPOs and educate themselves about the company’s fundamentals, they said.