With a long list of initial public offers (IPOs) in the pipeline this year, retail investors, both longterm players and those with a penchant for booking listing gains may look forward to an action-filled year. As many as 120 IPOs are likely to hit the market during the year.
The number can rise further with a slew of IPOs likely from public sector undertakings (PSUs) with the government's disinvestment target set at Rs 40,000 crore for 2011-12. While private sector IPOs, in hindsight, have not been the best bets during 2008, 2009 and 2010, market experts are hopeful that the offers from the public sector stable would provide decent returns.
Sunil Jain, vice-president, equity research, Nirmal Bang Securities, says, "More government-owned companies will be coming up with IPOs and FPOs (followon public offers) in the coming year and if you go by past performance, they will be safer and give reasonable returns." Follow-on issues are share sale offers by companies that are already listed.
"Two likely public sector FPO candidates are Oil and Natural Gas Corporation (ONGC) and Steel Authority of India Ltd (SAIL)," says Hemindra Hazari, head, research, Karvy Stock Broking. Often frenzied investors lap up any IPO and FPO that comes their way. But the trick is to pick the right issues for smart gains. Money Today gives you a list of dos and don'ts for IPO investment.
"IPOs and FPOs of government-owned companies will be safer and will give reasonable returns."
Nirmal Bang Securities
An attractively priced IPO often gets good response from investors as the chances of listing gains become higher. Conversely, if an IPO is "over-priced", it may not be able to list attractively.
IPO pricing is done in two ways-by book-building or through a fixed-price offer. Book-built pricing gives investors the opportunity to take a call on the price they are willing to pay. The underwriters generally specify the 'floor price' and 'cap price' (called a price band) and investors must choose a price within the given range. The most popular price among the investors is selected as the offer price (also called the 'cut-off price'). Shares are allotted to anyone who bids over the cut-off price, proportionately given the size of the issue.
Samar Vijay, director at Investcare says, "Book-built pricing has an advantage, especially because investors have a big say in the process. In the fixedprice method, underwriters, or the consulting investment bank, decide the issue price. Depending on the valuation of the company, investors pay a premium over the par value. "
So, how can one assess the pricing of an IPO? The most popular method is through 'peer valuation'. DD Sharma, vice president for retail research at Anand Rathi Financial Services says, "A comparison of the price of an IPO with the share price of its peers which are already trading can give an idea whether a new offer is overvalued or undervalued."
"One should compare vital ratios such as 'book value' and 'operating margins' of the IPO issuing company with those of other companies in the industry. If the company shows strong fundamentals, one should compare the cost of the IPO with the earnings history (or projections). By comparing earnings multiples, one can easily find if a company is undervalued or overvalued," Samar Vijay adds.MARKET SENTIMENTS
Apart from pricing, success of an IPO also depends a lot on the market sentiments at the time of listing. Those who are looking to make short-term gains must invest in the new offers only when the markets are bullish, say experts.
Market experts believe that domestic primary markets are looking weak at present. Alex Mathews, head of research at Geojit BNP Paribas Financial Services says, "Domestic primary markets are subdued right now, but the government or any other institution, looking to collect money by issuing shares, should consider pricing them attractively. If it happens it can easily mop up the required amount without much hassle. Aggressive pricing is the only way of attracting retail participants." Karvy's Hazari seconds Mathews' view, "The present IPO market is quite tepid due to the volatility in the markets. However, improved macros would see sentiments getting lifted and investors would be back in business."
"The government or other institutions, looking to collect money through IPOs, should price them attractively."
Head of Research,
Geojit BNP Paribas Financial Services
"I think the Securities and Exchange Board of India (Sebi) needs to improve governance among companies and investment managers should bring in IPOs specifically for small companies. And also bring in some mechanism to stop price manipulation after listing," Sunil Jain adds.TRACKING THE IPO INDEX
The BSE IPO index, which at present comprises of 63 companies, provides an indication of how IPOs are faring after listing. The index tumbled 10.61%, or 203.21 points, to 1711.03 between March 2010 and February 2011. In the same period, the Sensex was up by 8.48%. During 2010, there were 74 new issues, of which 61 were priced below their listing price as of March 4, 2011. These include Tirupati Inks (81.09% to Rs 10.20), Aster Silicates (80.03% to Rs 25.50) and Sea TV Network (80.03% to Rs 25.50).
In case you don't want to get caught in such a mess, do your duediligence before parting with that cheque to buy shares on offer in an IPO or FPO.