Markets

10 years after RPower listing: Busting many myths

KS Badri Narayanan Chennai | Updated on February 09, 2018 Published on February 09, 2018

 

February 11, 2008, was a historic day for the Indian stock markets. The shares of Reliance Power, after the company collected a record sum in its mega IPO (₹11,563 crore), got listed with much fanfare.

The IPO of Reliance Power had generated bids worth over ₹7 lakh crore and the issue got subscribed by more than 72 times.

Anil Ambani-controlled RPower had fixed the issue price at ₹450 a share for non-retail investors and ₹430 for retail investors. But those who were overjoyed on receiving IPO allotments were in for a rude shock, as the stock had a terrible start, thanks to adverse global markets, which was just the beginning of the meltdown following the US housing crisis.

RPower, which surged 19 per cent to ₹538 at open, saw the expectation of a dream debut vanishing into thin air within four minutes of listing. Shares nosedived to ₹355 and closed at ₹372.50. In just one day, billions of rupees of investors’ wealth had been wiped out. Sadly, the initial four-minute high was the only period the stock would manage to rule above the IPO price till date.

As a face-saving measure, the company announced free bonus shares in the ratio of 3:5 (three shares for every five shares held in the company) to all categories of shareholders, except the promoter group, shortly after listing. This reduced the cost of RPower shares to ₹269 for retail investors and to ₹281 for other allottees.

The listing and subsequent trading patterns in RPower have broken several myths in the stock market, which can offer useful lessons to the investor fraternity.

Brand name enough?

Ask any old-time investor, and he will say that if you want to bet on one person on Dalal Street it would be the (late) Dhirubhai Ambani, founder of the entire Reliance group empire. He was fondly called the architect of India’s capital market. Brand Ambani is synonymous with wealth creation and taking care of shareholders’ interest. But the RPower listing has taught the lesson that the business is more important than the brand name.

It is very difficult to define terms such as short-term, medium-term and long-term. In India though, in a bull cycle, holding a stock even for a year is considered as long-term and during a bear phase, anything over three years is considered to be long-term. However, for old timers, long-term still means a 10-year holding period.

The returns from RPower have punctured the myth that stock market investors who manage to hold on patiently to their investments through downturns can earn big rewards over the long term.

 

 

Is bull market eternal?

In three years, the stock of RPower lost 21.1 per cent and in five years, the loss mounted to 47.6 per cent. And for those who are brave enough to be holding the stock till date, the stock has lost 79 per cent!

Despite several lessons from history, stock investors often end up believing in secular bull markets. Irrational exuberance was at its peak in 2007-08. Investors failed to recognise the bear trap as easy money from the developed economies, mainly the US, started chasing assets and listed shares across the world. As a result, fundamentals took a backseat and greed emerged the winner. The collapse of Lehman Brothers brought everyone back to ground zero. The important lesson is avoid herd mentality and keep an eye on valuations.

Sunrise sectors

In every bull market, theme-based investors like to paint a rosy picture of some sunrise sector. Power generation was considered a sunrise sector in late 2000s, as India was embarking on major power sector reforms and ambitious privatisation. As the government was talking of major initiatives on coal, thermal and nuclear power projects, investors thought power stocks would turn multi-baggers. The bubble popped when the sector was plagued by corruption allegations and faced severe pricing pressure. It is not so easy to spot a sunrise sector!

Beaten-down stocks

Some investors tend to buy beaten down stocks on hopes of cost-averaging to bring down their acquisition price. There are investors who buy stocks which are at their 52-week lows as value picks, expecting to exit at the yearly high. The important lesson from RPower for them is — ‘Don’t catch a falling knife’.

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Published on February 09, 2018
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