• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Kumar Shankar Roy

Advertisement

There is something about small initial public offerings. Even as blockbuster public offers from Wockhardt Hospitals and Emaar MGF fell apart early this year, smaller offers from Tulsi Extrusions, GSS America and Manjushree Extrusions were pretty well subscribed. That too in times that could be termed as turbulent for public offers. While the exact reason for their popularity is not clear: whether an inexpensive price tag or sympathy for an aspiring company — small IP Os have been a big attraction.

Investors in Tulsi Extrusions, GSS America and Manjushree Extrusions reaped rich gains, amidst falling markets, as these stocks rose by at least 25 per cent on their market debut.

Small IPOs continue to enthral even now. Recall the recent listing of Aishwarya Telecom. Offered at Rs 35, the stock nearly tripled on debut and was a star in the ‘bulk deals’ segment for weeks. Small company, even smaller IPO (merely Rs 14 crore) but colossal returns! But Aishwarya is not alone.

A Business Line analysis of 64 IPOs shows that, in the last 12 months, small IPOs (raising less than Rs 200 crore) saw their stocks gain an average 38 per cent over their issue price just on listing! But are such instant riches sustainable? Going by the evidence of the last year, the ‘super-duper’ returns are, sadly, transient.

Last year saw small IPOs being routinely oversubscribed 30-50 times. The year 2008, however, has seen less robust subscription numbers, but interest among retail investors continues to be strong, at 4-5 times the offer size.

Though Qualified Institutional Buyers too have chipped in, most small IPOs have had their retail portion fully subscribed, with only six offers of the 64 seeing undersubscribed retail portions.

In the IPO market, good subscription numbers usually reflect in listing gains. Market followers will recall the bumper listing gains given by small companies such as MIC Electronics (124 per cent), Nitin Fire Protection (155 per cent), Everonn Systems (242 per cent) and Allied Computers International (214 per cent) on listing. These companies were backed by good subscription numbers too.

Though fundamentals may not be the prime consideration affecting subscription levels during the IPO, they do kick in post-listing. Take the case of Burnpur Cements, whose stock gained 252 per cent when it debuted in January.

This happened even as stocks of entrenched players such as ACC, Ambuja Cements and Ultratech Cement lost 9-20 per cent of their value in December 16-January 17 period.

Three months down the line, the Burnpur Cements stock pared gains and now trades at Rs 19, its returns shaved to 57 per cent over its issue price.

Similar instances are Roman Tarmat, Omnitech Infosolutions, Indowind Energy, Magnum Ventures, Saamya Biotech and Varun Industries.

All these stocks closed Day One with a 50 per cent gain over their offer price, but have today retraced most, or all, of these gains.

Roman Tarmat, in the business of constructing highways and runways, deserves a mention. Offered at Rs 175 per share, its shares closed at Rs 320 on debut. Then began the slow and painful journey southwards and today it rules at just Rs 67 — 60 per cent below its offer price!

Lesson : In small IPOs, book profits as soon as your target is hit, even if that happens in three days.

Low-value IPOs may be risky, but not all of them are a flash in the pan. Of 56 small IPOs that have a listing history of more than three months, 40 stocks ended their debut with gains.

Three months down the line, the number of companies that retained gains came down to 30, possibly because of market corrections, lack of interest and newer opportunities.

This indicates that, even with small IPOs, quite a few of the companies continue to hold gains, or may even climb, with the passage of time.

Take, for example, Kaveri Seed Company and Koutons Retail. Both of them recorded listing gains in the 30-40 per cent range but three months after, the share prices were enjoying premia of 70-130 per cent. For stocks with a longer listing history of, say, six months, 29 stocks ended up with listing gains out of a total 42.

Fast-forwarding to the end of the six-month period, the companies commanding a premium over their issue price fell to 20, of the original 42.

With half the small IPOs falling by the wayside, identifying the stocks that may pay for the long haul isn’t easy.

However, companies in niche businesses such as Kaveri Seed (hybrid seeds) and Koutons Retail (value retailing in Tier II cities), where there are not too many alternatives in the listed space, appear to have fared well. One factor that has helped small IPOs get good subscriptions, even in the choppy market of 2008, is the comparatively better pricing on offer.

While in the mid and later part of 2007, small IPOs were richly priced, in sync with the buoyant market conditions prevailing then — 2008 has seen investment bankers and companies leaving something on the plate for investors.

Offers such as Anu’s Laboratories, Gokul Refoils and Titagarh Wagons have neither been expensive nor too cheap compared to their listed peers.

The problem, however, is that a case for investing in an IPO cannot be made on the basis of the offer size; the business should be the more compelling reason.

For the retail investor, subscription figures from institutional and QIB investors may be one indicator of business fundamentals.

Lesson : Unless you like the business on offer in a small IPO, do not take a decision based only on size.

More Stories on : Stock Markets | Insight | IPOs

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
An NRI plans to meet his goals

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line