Think twice before investing in IPOs

An economic times article:

Ten out of 16 initial public offerings (IPOs) that made their debut on the bourses this calendar year are quoting below their issue prices, a statistic that is likely to make investors think twice before rushing to put money into the next ‘hot IPO’. But merchant bankers are not to be dissuaded so easily. They feel the primary market is showing signs of a revival, only that investors have become a bit more finicky about the price they are willing to shell out.

“People are coming back but at a price,” said an investment banker with a leading domestic brokerage. “Unlike the earlier trend of where any issue was oversubscribed, there is an element of caution today. In a highly volatile market, most investors prefer secondary market trade rather than primary market trade,” he added.

Industry experts aver the new issuances and their performance on the bourses in the recent past also need to be judged against the backdrop of whether the deal was announced before the market crash (January 21) or after the market crash. Most importantly, if the crash was taken into account in the IPO pricing.

“Most IPOs are priced to their peer groups. In the instance of Emaar and Wockhardt, their valuations were compared to their peers in a bear market,” said an industry source.

The meltdown in share prices mid-January adversely impacted the performance of many stocks on listing. “New issuances once listed, are but a subset of the secondary market. As such they will be impacted by all developments of the secondary market, be it industry as a whole or company related news,” said Prime Database MD Prithvi Haldea.

BGR Energy, Burnpur Cement, Manaksia, Precision Pipes & Profiles Company, Aries Agro, Porwal Auto Components, Future Capital Holdings, Reliance Power, J Kumar Infraprojects, Cords Cable Industries, KNR Construction, On Mobile Global, Shriram EPC, Bang Overseas, IRB Infrastructure Developers and Tulsi Extrusions are the 16 issues that debuted in the calendar year 2008.

“Post-listing, primary and secondary markets catch up with each other. The valuation of companies in the secondary market has corrected, as a result some of the companies listed in this period were also impacted. However, there is no denying that for quality issuances there is appetite at every level from investors. Hence if two-three issues are quoting above their offer price it is a function of quality,“ said an i-banker with a leading foreign brokerage.

The partial revival in sentiment notwithstanding, there is no denying that confidence levels are at an all-time low. And for the retail investor given a choice between an already listed stock and a new listing, there is but one way to go.

“A volatile market is detrimental to IPOs. It has left the retail investor jittery about taking positions in already listed stocks, so they are bound to be cautious about investing in new listings,” said Mr. Haldea. He expects the primary market to go through a lull phase till post budget.


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