The Hindu Business Line : IPOs: Rich on listing, lacklustre later

OVER the past 18 months, post-listing returns on initial public offers have been so good that it has conjured up an image of IPO trees, off which one can pick plenty of low-hanging fruit. The astronomical gains in stocks such as Saksoft, FCS Software, Bartronics, Gateway Distriparks and Bharati Shipyard has only reinforced this perception.

In recognition of this heightened interest among retail investors, Standard Chartered Mutual Fund has even come out with a fund that invests only in IPOs. Such are the expectations from IPOs that they are seen as vehicles in which one can zoom past the indices. While that may have been true for a while, in more recent times, investing in public offers has not been a cakewalk.

Gains on listing were much lower for the IPOs of 2005, compared to the 2004 crop. Post-listing gains for the IPOs are, barring a few exceptions, hard to come by. Even in the seasoned offers, the returns are more moderate. Rights offers, too, have proved a mixed bag.

The writing on the wall is thus clear. If listing gains are significantly high, investors should consider exiting IPOs early, after their trading debut, as the performance tends to deteriorate over time vis-à-vis the Sensex or the Nifty.

Greater interest, lower returns: Though market interest in IPOs has been picking up, as reflected by the enthusiastic subscription levels and offer sizes, IPOs in 2005 have under-performed those of the preceding two years. The latter's average listing gains were 56 per cent, against the former's 50 per cent.

Among the 2005 IPOs, only Nandan Exim is in the league of top performers, when seen against Sensex returns. Sixteen of the IPOs of 2005 under-performed the broad market indices.

Pricing of offers has become more aggressive, in line with the secondary market valuation levels, and this appears to have reduced the scope for gains on listing and post-listing. The new regulatory requirement that FIIs must pay a part of the price upfront has also reduced the scope for subscription levels and listing gains.

Different features: The IPOs of 2005 may, however, not strictly be comparable to the offers made in earlier years. There is a discernible change in the number and type of companies that tapped the market in 2005. For instance, textile companies, strapped for funds to exploit the opportunities thrown up by the quota phase-out, made a comeback.

The retail sector, with Shoppers' Stop and Piramyd Retail tapping the market, was among the sunrise sectors. Educomp Solutions, Bartronics and GatewayDistriparks, operating in niche businesses, also featured in the 2005 list.

Do stocks always close above the offer price on debut trading? Well, expect the unexpected, even in a bull market. Listing gains are not guaranteed, as quite a few stocks shed value on their trading debuts, despite the strong interest in IPOs. Shringar Cinemas and Jaiprakash Hydro are examples in the low-priced category, while Bannari Amman Spinning, Allsec Technologies, and 3i Infotech are instances from the higher-priced IPOs.

A common characteristic of IPOs that registered losses on debut trading was low subscription levels; in most such cases, the subscription level was less than six times the offer size.

Post-listing gains: How long should one remain invested in an IPO? Investors should consider divesting their exposures in IPOs by the end of the first month from debut trading, as there is little incentive to hold beyond that. Though several stocks debut at a substantial premium over the offer price, such gains take away their ability to outperform the indices after the first day's trading. Over a three-month period, the average post-listing gains from the IPOs of 2005 were lower by 4 percentage points than the Sensex.

Investors who missed out on IPO allotments should stay away from entering these stocks, as much of the gains are concentrated on the listing day. For instance, FCS Software, Indoco Remedies and Sasken Technologies, which attracted high subscription interest and listed with huge gains, declined from the first day's price.

Is an IPO that is marketed extensively and managed by high-profile lead managers a better option? No. Investors would be better off investing in much less-hyped IPOs; this is substantiated by the post-listing performance of high-profile IPOs such as Jet Airways, Biocon, TCS and NTPC, compared to less-known players such as Nandan Exim, Ramakrishna Forgings, Gateway Distriparks, Bharati Shipyard and Vivimed Labs.

Sector takes: Which sectors are better investment options in an IPO? Investors with a long-term perspective should take a cautious approach while taking exposures in IPOs from the pharmaceutical and chemical sectors, as they have been significant under-performers to the broad market indices.

Nectar Lifesciences, Mangalam Drugs, and Vardhman Acrylics at current levels are quoting below their offer price. Investors seeking to profit from listing gains could employ their funds more efficiently by avoiding these sectors, as their returns on listing were also not too attractive.

A similar strategy may also be adopted for media stocks, both print and electronic. Investors who opted for offers from the construction and engineering space enjoyed rich gains despite low subscription levels in a quite few of them.

The price effect: Does the offer price play a factor in returns? While investment literature tells us they should not, the reality, however, is different. The price effect continues to have a hold over the stock market. The IPOs of 2005 that were priced at Rs 99 or below out-performed those pegged at Rs 100 or above.

On debut trading, the average return on lower-priced IPOs was 40 per cent, while in the higher priced ones it was 32 per cent. Further, the gap widened in favour of lower-priced IPOs over a five-month period from the listing date. The level of returns from lower-priced IPOs was, however, inconsistent, with listing gains varying from 324 per cent (Saksoft Communications) to just about one per cent (Vikash Metal).

In the IPOs priced above Rs 99, gains on listing varied between 4.5 per cent and 128 per cent. This was only a continuation of the trend that prevailed in earlier years, when low-priced offers such as Ramakrishna Forgings and Power Trading Corporation significantly outperformed the high-priced ones, such as Indoco Remedies and Biocon.

Book-built vs fixed price: Are book-built offers priced better than fixed-price ones? Well, not really. The book-building process may serve as a medium for better price determination; such offers may also attract higher levels of subscription, but the bidding patterns, ironically, tend to favour the issuer rather than the investor.

Fixed price offers, given the lack of book-building to discover the optimal price, may be offered at a more attractive price by the issuer. They do tend to outperform book-built offers. For offers during the preceding three years, average returns of fixed price offers was 63 per cent, against 35 per cent for book-built offers. A few of the notable book-built offers that continue to quote below their offer price include HT Media, Datamatics Technologies and TV Today.

What if you miss: If you have missed out on a fundamentally attractive IPO, do not buy in the first few months after listing. Let the euphoria peter out and wait for the stock to stablise. A four-to-six month period may be appropriate. This may also enable you to track earnings announcements, avoid nasty surprises (earnings cards may be spruced up ahead of an offer) and then take an exposure, if the long-term prospects are bright.

By doing so, you may miss out on exceptions such as Gateway Distriparks or Bharati Shipyard, which rose consistently even after the listing date. But this approach will, in general, pay richer dividends than plunging headlong in the immediate aftermath of listing.

Valuable rights

HOW did right offers pan out vis-à-vis seasoned offers? Investment in rights offers generated handsome returns, which were also less volatile than those from seasoned offers. Though stocks that came out with such offers reflected a similar pattern in the run-up to the offer period, the extent of upward trend was more moderate.

Most of them also managed to hold on to the gains after they went ex-rights; prominent among them were Simbhaoli Sugar and JMC Projects. Value of holdings (including investment in the rights offers) in Gati, Texmaco, Saregama, ING Vysya Bank, Bihar Caustic, Bharat Forge and MicroInks more than doubled over a six-month period since the stocks went ex-rights.

Saint-Gobain Sekurit and Sangam India were the only ones that did not offer immediate value to shareholders who invested in the rights offers. But even in these two cases, six months after the offer, investors enjoyed the benefit of reasonably attractive returns.

Seasoned offers: How did `seasoned' (equity issues by established listed companies) offers pan out? A common characteristic of `seasoned' offers has been a sharp rise in market prices in the homestretch to the offer.

Stocks such as IVRCL and Emami, among the top gainers, were the only ones to maintain the price momentum in the ensuing five months. Oriental Bank of Commerce and Punjab National Bank under-performed the market during this period. Most seasoned offers proved a disappointment, as they were aggressively priced close to the market price.

Do `seasoned' offers with discounted prices to ruling quotes shine? No, again. Any seasoned offer with a discount of more than 20 per cent to market price must be viewed with greatscepticism. This is best exemplified by Jindal Polyfilms; about a month before the close of the offer, the stock ruled about 40 per cent higher than the offer price of Rs 360. But the stock dropped to about Rs 260 by the end of December. Others that reflected a similar pattern included Gujarat Industries Power, Talbros Automotive Components and Dena Bank; six months after the equity issue, they traded below the offer price. Investors may thus opt for such offers more judiciously and selectively.

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