Retail investors in IPOs got it wrong this time too. Most initial public offers that witnessed strong response from retail investors this year listed at discount in the bourse and disappointed investors. Three out of every five stock that debuted this year has listed at discount. Of the total 31 issues so far this year, just eight of them are currently trading above issue price.

It would have done retail investors some good had they taken cues from institutional investors. Yes, QIB (qualified institutional buyer) portion was undersubscribed in 70 per cent of offers this year.

Timbor Home, Readymade Steel India and Paramount Print Packaging are a few issues where retail portion was over-subscribed but the institutional portion met poor response. These three stocks are down 30-50 per cent from issue price now.

Performance of IPOs is linked to market conditions. Last year a good number of IPOs gave listing gains as bulls were in action then, and Sensex had touched 20k by October. But investors hoping to make money in IPOs by flipping them on listing day would have been sorely disappointed this year as things took a turn for the worse.

IPOs at discount price

Investors who were very keen on the IPO stocks could have picked them up at a lower price in the secondary market. Twenty three of the 31 issues this year are trading below their issue price. Bharatiya Global Infomedia, Acropetal Technologies, Shilpi Cable Technologies and Servalakshmi Paper are ones that have fallen around 75-85 per cent from issue price.

These IPOs listed between April and July — a period when Sensex had corrected eight per cent. With the market having corrected significantly in 2011, many of 2010 IPOs are also available at discount price now. Some of the most sought after issues last calendar that were oversubscribed multiple times such as Tecpro Systems, Ashoka Buildcon, DB Realty and SKS Microfinance are trading in the market at a discount of 20-80 per cent to issue price. Are you game for them now?

Poor quality issues

Last year institutional investors were on prowl looking for IPOs and they jumped on every other offer. Of the 56 initial public offers in 2010 between January and October, 50 of them saw QIB portion being over-subscribed. In contrast, this year only nine issues (of 31) have been successful in getting QIB portion fully subscribed.

Pondering the reason for poor response from institutional side we found that most issues were of poor investment quality. 20 of the 31 issues of this year were of grade 1 and grade 2 indicating ‘below average fundamentals.'

Mulling issues of last year we, however, found that 60 per cent of them got a grade above 2, a sign that the offers were of better quality and had value for investors.

Retail investors, however, don't appear to have given IPO grades any importance.

Timbor Home which got grade 1 indicating poor fundamentals saw retail portion being subscribed 14 times.

Sudar Garments and VMS Industries are others that got grade 1 from rating agencies but elicited good response from retail side.

Some of the IPO stocks that saw frenzied movement on the listing day rising 30-90 per cent have fallen sharply in the subsequent days. Take for instance the stock of Timbor Home. The stock's issue price was Rs 63 and it closed on listing day at Rs 91 and it currently trades at Rs 33 in the bourse.

Similarly, Sanghvi Forging and Engineering which made a 32 per cent gain on the listing day is trading 72 per cent below its issue price now. Sudar Garments that listed at 47 per cent gain is down 15 per cent from issue price now.

Frenzied movements on the listing day are driven by speculators, say market observers. So, be cautious while trading on IPOs on the listing day, you may then be caught in the stock forever. Remember some of the 2008 IPOs (Gammon Infrastructure Projects and Future Capital Holdings) are still below their issue price.

Plan for Long-term

At times such as the present situation when there is a fund crunch in the market some good companies may also take the route to public offers to raise funds. This might provide a good opportunity to long-term investors to pick such stocks either during the offer period or post their listing.

Don't shrug off IPOs completely in a bear market. Aanjaneya Lifecare, one of the seven IPOs in which we gave a buy recommendation this year is up 90 per cent from its issue price. The other — Lovable Lingerie, is up 128 per cent from its issue price. Stocks such as PTC India Financials, L&T Finance Holdings and Muthoot Finance which have corrected post listing continue to be good buys.

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