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IPOs that hit the markets between 2007 and 2009 are trading below

IPOs that hit the markets between 2007 and 2009 are trading below

The tide has gone out of the Indian stock markets, leaving several listed companies thoroughly exposed. More than half the IPOs that hit the markets between 2007 and 2009 are trading under water.

You only learn who has been swimming naked when the tide goes out.
Warren Buffett, Chairman and CEO, Berkshire Hathaway, in his annual letter to shareholders

The tide has gone out of the Indian stock markets, leaving several listed companies thoroughly exposed. They were all on a roll through 2007 and early 2008, with the Bombay Stock Exchange's benchmark index, Sensex, hitting an all-time high topping 21,200 in January 2008. The global economic downturn that followed did hit the markets hard - the Sensex dropped like a stone to nearly 8,000 in March 2009. But it recovered again to reach the 17,000 level by October 2009. As many as 157 initial public offerings, or IPOs, hit the markets in these three years, raising a total of Rs 70,627 crore, estimates Prime Database, a market offerings tracker.

Yet 84 of these 157, or more than half, are currently trading at far lower than their issue prices. Overpriced and excessively hyped IPOs and those with questionable fundamentals - as well as some which were hit by unforeseen external factors - have all suffered. "The markets were unduly bullish at the time," says Chirag Shah, analyst at ICICI Securities. "Money was easily available and promoters got the valuations they wanted. But eventually everything finds its own level."

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Take Delhi-based DEN Networks, for instance. A multi-system operator, or MSO, which provides analogue and digital cable television services across 84 cities, DEN Networks tapped the capital markets in November 2009, raising Rs 390 crore selling shares at Rs 195. For almost a year, the scrip stayed close to the issue price, touching an all-time high of Rs 254.40 in August 2010. But since then it has shed 58 per cent of its issue price. It was trading at around Rs 107 in May 2011.

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"It is because of our slow pace of digitisation in the past few months," says Mohammad Ghulam Azhar, President, Strategy and Business Development, DEN. Why should that matter? Because MSOs such as DEN depend upon local cable networks both to take their bouquet of channels to end users and to collect user fees. Digitisation - or migration from analogue to digital networks - leads to better reporting and in turn better revenues. The more an MSO digitises, the more it is appreciated on the bourses.

DEN is not alone. Other MSOs and media and entertainment companies have also suffered for similar reasons. Shares of Raj Television Network, Broadcast Initiatives and Cinemax, which too came out with IPOs in the same period, are down by 70 to 80 per cent from their listing prices.

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Another near-disaster, for very different reasons, is the Chennaibased Shriram EPC. The company provides services to renewable energy projects, metallurgical and process plants and municipal water-based plants. In February 2008, it raised Rs 150 crore from the market at an issue price of Rs 300 per share; today, it trades at around Rs 130. While many observers say Shriram EPC overvalued itself, Arun Duggal, its Chairman, demurs. "Our revenue growth did not pan out the way we were expecting in the past three years," he says. Against a compound annual growth rate of 138 per cent in revenues between 2003/04 and 2007/08, Shriram grew just 40 per cent between 2007/08 and 2009/10.

A number of other players in the same or similar space such as Gammon Infrastructure, DLF, Omaxe, Consolidated Construction Consortium, Simplex, Purvankara Projects and KNR Construction that also launched IPOs during the three years have met the same fate; their current share prices are hovering at 30 to 90 per cent below issue prices. Companies in the telecom sector are all having a rough time. The stock price of Nu Tek India, a telecom infrastructure player, seems to have eroded the most. Against an issue price of Rs 192 per share, Nu Tek is now trading at Rs 10.96 (taking into account its 2:1 share split). "It is the business environment that has turned unfavourable," says Vineet Goel, General Manager, Corporate Strategy, Nu Tek.

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"Our margins declined because of competition." He says whenever telecom companies reduce call rates, or pay huge amounts for licences - as they did during the 3G auction last year - there is pressure on companies like his to charge less for equipment. "In 2007, we used to charge Rs 4 lakh to install a telecom tower, the price is down by 40 per cent now," he adds.

Other telecom firms that have been hit since their listing range from Idea Cellular, down 14 per cent from issue price, to Dhanus Technologies, down 95 per cent. Competition has taken a toll on them all, though a few have faced other singular problems.

OnMobile Global, which provides telecom value-added services, listed in February 2008 with a grading of four at Rs 440 per share. The stock is trading 51 per cent below its issue price today (accounting for the 1:1 bonus shares issued last month).

"Operating profits have been hit because of new investments in Brazil, Argentina and Venezuela, following our deal with Spanish telecom giant Telefonica," says Arvind Rao, CEO and Managing Director. "The expansion plan was off the radar at the time of the IPO."

New norms, new troubles

The Bombay Stock Exchange, or BSE, recently issued fresh guidelines for small and midsize companies that were suspended from the exchange for failing to comply with its norms for over a year. From July this year, the listing eligibility criteria for such companies will be raised from Rs 3 crore paid-up capital to Rs 10 crore. In addition, the companies will be required to show they had a net worth of at least Rs 50 crore for three financial years immediately preceding the application for re-listing.

Market experts reckon that the new rules will badly affect retail investors who are stuck with these companies' shares. According to some estimates, there are around 1,400 companies which have been suspended from the BSE. A 2009 study by Mumbai-based CNI Research revealed that of these, around 789 companies had a market capitalisation of Rs 60,683 crore at the time of suspension. Over 95 per cent, or Rs 57,563 crore, of this market cap comprises retail investors' money, while the rest includes institutions' and promoters' stake.

"The decision could leave the fate of millions of individual investors hanging in the balance,"says Kishor Ostwal, CMD, CNI Research. "BSE needs to rework this and perhaps launch some scheme whereby smaller companies get a chance to list again after paying the penalties imposed and complying with the exchange's rules and regulations,".

A report by brokerage firm Asit C. Mehta Investment Intermediates says the relatively slow rise in 3G revenues and the general weakness in the European markets will continue to put pressure on revenues.

Most power companies are also faring poorly at the bourses. Be it big ticket IPOs like Reliance Power, NHPC, Indiabulls Power and JSW Energy, or little-known ones like Indowind Energy and KSK Energy Ventures, all have performed below par. (See Laggards on Dalal Street.) The biggest disappointment has been Reliance Power. whose Rs 11,700 crore IPO - the second biggest ever after Coal India's - got a rousing response, being oversubscribed 69 times. Yet today the stock has been beaten down by 61 per cent of its issue price (also taking into account the 3:5 bonus issue which the company introduced within 20 days of its listing).

"From early 2010, the power sector has been in serious trouble," says Shah of ICICI Securities. "It is mired in problems relating to environment clearances, land acquisition and coal linkages." State-owned NHPC's stock is down since work was stalled by local opposition at two dams it was to build: the Lower Subansiri hydroelectric project on the Assam-Arunachal Pradesh border and the Parbati II project in Himachal Pradesh.

Opposition to its plant is also the reason why Cords Cable Industries, a manufacturer of various kinds of cables, has seen its valuation plunge. Cords listed at Rs 135 per share in early 2008 and is currently trading at Rs 31.25. The main reason is its inability to put up a new plant at Pathredi in Rajasthan - for which it drew funds through the IPO - despite having bought land, due to resistance from the villages around. "In 2007/08, we were doing business of Rs 200 crore per annum. Since we could not commission the new plant, our income suffered and revenues grew only 10 per cent between 2007/08 and 2009/10," says Managing Director Naveen Sawhney.

Interestingly, these IPOs had received favourable ratings. To help minority shareholders make informed choices, SEBI had made IPO grading mandatory for all companies in May 2007. Rating agencies were optimistic about many of these IPOs, grading them at three or four on a scale of five. How is it that stocks that were rated highly plunged soon after? "In many cases, IPO pricing went beyond the intrinsic value of the company," says Raamdeo Agrawal, Joint Managing Director, Motilal Oswal Financial Services. Issuers and retail investors are both to blame, he says. "Issuers are the best judges of pricing. But the process has turned into a short-term play. Retail investors treat new IPOs like a lottery. They want to earn quickly and sell out within six months."

The biggest sufferer, of course, is the small investor who put his money in these companies. "We have been raising this issue with market regulator SEBI," says G.S. Sood, President, Society for Consumers' and Investors' Protection. "We have suggested they blacklist and penalise merchant bankers whose three consecutive IPOs have not done well post listing, which would minimise market manipulation. But SEBI thinks disclosure norms are enough. Given the poor financial literacy in the country, SEBI needs to take some proactive steps."

Published on: Jun 20, 2011, 12:00 AM IST
Posted by: Navneeta N, Jun 20, 2011, 12:00 AM IST