IT IPOs: Shades of mid-1990s

S. Vaidya Nathan

THOUGH the media IPOs are in the limelight, in terms of sheer numbers, the initial public offerings from the information technology sector stand out.

As the prices of listed IT stocks started to move up sharply, so has the business of making IPOs by unlisted firms. And all those who came to market were by no means players with established operations.

Such companies constituted less than 10 per cent of the IPOs on offer from the IT sector. And, by the end of the year, most companies in this category, such as Mascot Systems and Geometric Software, were deeply in the red when compared to the offer price. The latter, in fact, issued an earnings warning for the July-September quarter within months of its IPO. This led to a sharp marking down of its stock price.

Most of the IPOs also suffered a similar fate, as the market fancy for IT stocks turned dramatically after March 2000. The small and mid-sized companies bore the brunt, with losses going up to 90 per cent. To some extent, the fact that the IT IPO market got a hard knock within months of taking off is a blessing in disguise for investors.

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For as each IT IPO document came in, the deterioration in quality from what was a poor starting point became clear. It came to a stage where in one particular IPO, exposure to MS-DOS, Wordstar and Lotus 123 was cited as the experience of promoters.

And in a manner reminiscent of the IPOs from the non-banking finance companies, which promised everything `financial' under the sun, the IT companies offered to engage in virtually every IT-related activity. The gloss, of course, was provided by the stress on Web-based businesses. But many of the IPOs did not find many takers.

With the National Stock Exchange and the Bombay Stock Exchange raising their listing threshold levels, most of the smaller IPOs were listed on the regional stock exchanges. Hyderabad, Bangalore, Chennai and Ahmedabad were the more frequent listing centres. Not too many of them appear in a position to graduate to the NSE and the BSE.

This has been the general strategy but, due to the decimation of stock prices, it appears unlikely that any of these companies will be able to quickly match the market cap norms.

Other pointers

*The top IPO of 2000 was neither a media nor an IT company. It was Aksh Optifibre that provided the highest returns in the IPO universe. The company is engaged in the manufacture of optical fibre cables and is also integrated backward into the manufacture of optical fibre. It has expanded capacity and could emerge as a major player in the segment along with Sterlite Optical.

*Book-building has become a widely accepted way of offering equity. Most of the highly-priced offerings of 2000 took this route. But there is no evidence to suggest that this enhances acceptability of the IPO in the retail (called the fixed price portion, in SEBI's lexicon).

*It was also a year when SEBI did more than its fair share of tinkering with the regulatory framework for IPOs. The threshold limit for IPOs by media and IT companies was reduced to 10 per cent of the equity. Later it was extended to all the sectors. But the moves have made the regulatory framework unwieldy.

*The small number of rights offers also suggests that most existing companies had no major investment plans. The most prominent one was Electrolux Kelvinator -- the only rights offer that provided a respectable level of returns. The one quasi-rights offer that could hold some potential is that of Ashok Leyland Finance, which offered convertible preference shares.

*From among the IPOs and rights offers that hit the market in 2000, Electrolux Kelvinator, MRO Tech, Geometric Software, Adlabs, Balaji Telefilms, Shree Rama Multi-tech, Cinevista Communication, Opto Circuits, Chettinad Cements and PNB Gilts could merit a look at current price levels from an investment perspective. Caveat: Every one of them, with the exception of Shree Rama Multi-tech and Aksh Optifibre, carries a high degree of risk.