Yesterday, I was asked the following on IPOs, presumably because of Thyrocare’s stellar debut:
“Do IPOs provide better returns as compared to stocks?”
Presenting my answer with minor edits:
I was sure this question was lurking around considering what happened with Thyrocare today!
So lets have a little blast from the past.
- Reliance Power:
To quote from the news item:
“The company’s board has fixed the issue price at top-end at Rs 450 per share for the Reliance Power issue and for retail investors at Rs 430 per share,” Reliance Power Chairman Anil Ambani told reporters here on Saturday.
Following the IPO, the largest ever in the country, ADAG Group has become the second largest corporate house in the country with market cap touching $100 billion, Ambani said.
As many as four crore forms were distributed, the IPO received record subscription of Rs 7,50,000 crore ($190 billion), which is largest ever subscription in an IPO in the history of the global capital markets.
The company has also received $100 billion from foreign investors. Without naming them, Ambani said all the big investors across the world have invested in the IPO.
The company also has no plans of listing abroad, he said With a planned installed capacity of 28,000 MW, Reliance Power has one of the largest portfolios of power generation assets under development in India.
Most of the money from the IPO proceeds is expected to be utilised to part finance the 4,000 MW Sasan project, which Reliance Power bagged after Lanco’s bid was disqualified.
Asked on the company’s future plans, he said, “We are here not to meet targets but to beat the targets.”
Each of the various stream of power projects is likely to have eligibility of carbon credit, he added.
The bold part is important. Its grandiose. Lets see how RPower beat the targets:
The company immediately after the IPO issued bonus shares in order to arrest the prices. Well not withstanding that it lost more than 80% of the value
India’s largest real estate development company and largest market cap company in the real estate segment, DLF , has listed at Rs 526.60, which is just close to its issue price of Rs 525. But on the account of huge buying interest from institutionals, the stock touched a high of Rs 583.95.
Sure enough they were not irrational here is another the description of the IPO:
DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF�s main area of operation is Delhi and surrounding areas.
DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.
Developed approximately 220 million square feet, including approximately 195 million square feet of plots, 17 million square feet of residential properties, 6 million square feet of commercial properties and 2 million square feet of retail properties.
Land Reserves of approximately 10,255 acres.
for the three years ended March 31, 2006, 2005 and 2004, DLF’s consolidated total income was Rs. 12,420 million, Rs. 6,260 million and Rs. 5,266 million, respectively, and consolidated net profit was Rs. 1,917 million, Rs. 865 million and Rs. 538 million, respectively.
But here is what has happened to the stock price:
Sure enough the money quickly doubled after the IPO (Rpower didn’t even give that short term happiness). But then the party ended. The prices today have produced a stellar -80% returns
To quote the article on listing performance:
Edelweiss Capital, a diversified financial services company, has listed at Rs 1443.75 on the NSE, with a premium of 75% over its offer price of Rs 825 and touched a high of Rs 1608.75, a whopping premium of 95%. Its hovering between 1450 to 1550 now , anything at the rate of 1400 should be a good buy and they are yet to get approval to start Mutual fund business and that income will kick in from 2008 results.
If you noticed this listing actually beats Thyrocare Performance of 49%
There must have been strong reasons for such stellar performance (if you actually believe in news articles)
To quote from the link:
Edelweiss Capital Limited is in the business of providing investment banking, institutional equities, private client broking, asset management and investment advisory services, wealth management, insurance broking and wholesale financing services to corporate, institutional and high net worth individual clients. Edelweiss is headquartered in Nariman Point, Mumbai and operate from another 43 offices in 21 Indian cities and employed around 843 full time employees including 40 research professionals.
Edelweiss Capital Limited operates its business thorough ten subsidiaries. At high level Edelweiss business is divided in to two parts:
1. Agency business lines:
This includes Investment Banking, Institutional Equities, Private Client Brokerage, Wealth Management, Asset Management and Insurance Brokerage businesses.
2. Capital business lines:
This includes Treasury, Wholesale financing like loans against shares and loans to finance subscriptions of IPO shares and loans against mutual fund units businesses.
In fiscal 2005, 2006 and 2007, our consolidated total income was Rs. 770.5 million, Rs. 1,580.0 million and Rs. 3,712.5 million, respectively. In fiscal 2005, 2006 and 2007, consolidated profit after taxation and minority interest was Rs. 224.8 million, Rs. 405.5 million and Rs. 1,090.1 million, respectively.
Great Business Great Plans etc. So, how did it fare? Have a look:
At one point it was down over 88% from its peak values.
These are just a handful of examples from my memory. But there were many such scripts. To be sure before handing out investors losses some of these companies exhibited exuberant returns (like you might be seeing in some current & future listings). This is what sucked many investors in. So of course you are not alone to feel enticed to book quick profits by subscribing to IPOs. If you have some technique to figure out when will a stock peak or blow out, you have a chance. But you need very strong reasons to actually ignore the objective examples I have outlined. Most of the IPOs have similar fate. But retail investors get attracted to them nevertheless, so much so that anyone suggesting them to stay away would sound at best over cautious or at worst outright foolish.
You would be surprised to know that many seasoned investors as a rule stay away from IPOs because of their notorious track record (Ref Pat Dorsey of the Morningstar fame). From our examples it should be clear that they have solid reasons.
The fact is that the price moves like what happend in Thyrocare (or for the examples we have referred to) are based on excessive exuberance of investors which may have little basis in reality. For example Edelweiss was supposed to be a highly diversified group in the high & might financial sector. So was the case for DLF which had huge land banks. Investors piled on them out of their greed but justified their buying by the logic that since these are profitable businesses which have raised more money they would be more profitable in the future. The reality though is that just because a company has the money doesn’t mean it would immediately start earning profits from it. Developing businesses takes time. Just like 9 women cannot be produce a baby in 1 month (as opposed to 1 woman producing a baby in 9 months). Similarly having the money is not going to immediately start producing huge profits. Many people forget this simple fact and justify their greed as sound investment strategy. Unfortunately it has the potential to end very badly when the party ends.
So unless you know when the party is going to ends, investing in IPO is not as enticing as it might appear to be.