Their Story. How investors made money in IPOs

The primary market is showing signs of life after lying dormant for quite a while. But for investors who bought Initial Public Offers (IPOs) in the past, it hasn’t been smooth sailing. Only half the initial public offers and follow-on offers from the last 10 years still trade above their issue prices.

With such dismal statistics, what strategy have investors adopted with their IPOs? We spoke to a few investors to find out.

Making money

The majority used IPOs only to pocket some quick gains. They simply cashed out on the gains the stocks made on their market debuts. Take Ritesh Chaudhury, for example, who likes to jump ship on listing. This saw him make sizeable gains in the IPOs of MCX and Educomp Solutions. Both stocks listed at a premium but took a drubbing in the markets thereafter.

Pune-based software professional Prabhat Donepudi also takes a short-term view of his IPO investments, though he’s usually a patient secondary market investor. He’s booked gains on the IPOs of internet and phone search service- Just Dial and the public sector behemoth Coal India. But he lost money on Acropetal Technologies, he rues.

The strategy of selling quickly on early gains was also adopted to good effect by Avinash Desai, a professional in Chennai. He’s cashed out on listing day in every IPO he has invested in and hasn’t yet lost money on his bets. But now, “I feel there are better opportunities in the secondary market, so I have stopped looking at IPOs,” he states.

This is a sentiment also echoed by Thiyagarajan M, another Chennai-based professional. While he’s made good money in the IPOs of Coal India, MOIL, and Power Grid, he’s decided to divert his focus to the secondary market lately. Well, that does make sense now. IPOs made in bull markets have seldom delivered in the long term as they tend to be quite highly-priced. Siva Kumar hasn’t invested in the issues that have come up in the past few years, as he feels these were fully or even excessively priced at times. “Market conditions are unfathomable” he says. “I’ve, in fact, scaled back my stock investments. I am not convinced that a level of 28,000-29,000 is justified, given the current picture.”

For the long haul But for some investors, the charm of IPOs lies in the fact that it’s possible to snap up a future blue-chip; but these investors had to put a lot of homework into the investment. A sound company at reasonable valuations was the attraction for Jaison George, a Bangalore-based finance professional which prompted him to invest in IPOs. “Usually,” he says, “offer prices are pegged lower than the intrinsic price discovered by the company’s valuation. I look for companies with a proven track record of at least, say, three years, and which I think has the potential to grow well. It’s best if they are backed by a strong business group, venture capital fund, or maybe the government.”

And he’s learnt this lesson from bitter experiences in the past. The case in point? The issue of Reliance Power, which still trades 34 per cent below its offer price. New issues which have worked for him include V-Guard, Power Finance Corporation and REC.

A long term strategy was also what Chennai-based consultant Arun Krishnan had in mind when he considered the issues of Coal India and MOIL. He found these to be attractive due to their relative monopoly in their markets, even if they weren’t exactly very efficiently run. But of IPOs in general, he has this to say, “I feel that IPOs are more hype than substance — especially since merchant bankers are anyway mandated to raise as much as possible.”

C.V. Srinivasan used to invest in IPOs of old. He’s held on to blue-chips IPOs such as State Bank of India, on the basis of their good pricing and solid business. He’s cashed out in smaller ones such as Sun TV Networks, declaring the risks to be higher in mid-caps. He tuned off IPOs after he lost a packet on Reliance PowerThese players have gained from digging deeper into the growth potential and soundness of business.

Judging issues But given that IPOs are tricky beasts, how do retail investors judge potential in the first place? The prospectus certainly gives detailed information, but going through 300 or 600-page ones with a fine-toothed comb can be arduous. Well, as it turns out, people usually don’t. They instead rely on other sources.

“I don’t have the time to read through the whole document,” declares Thiyagarajan M. “I rely on expert advice and analyses that various news channels and other publications put out.” Arun Krishnan does the same. As he puts it, “I don’t have the financial knowledge to go through the data, nor do I have the patience. I go through company websites and management discussion and analysis .”

C.V Srinivasan usually skipped reading the prospectus. He relied on publicly available information of the companies along with word-of-mouth and discussions with friends and colleagues.

Changing faces The IPO market itself has undergone changes over the years. Old-timer Subramaniam Shankar says that SEBI has become far more vigilant now. “We’re also getting quarterly results, analyses and projections which make for more informed decisions.” Still he says, “The sheer amount of information makes it hard to understand these offers.”

Srinivasan has another lament. Back then, he says, issues that came out were solid companies whose business was already well-known, such as a Godrej or State Bank of IndiaQuality issues these days are hard to come by, barring maybe a rare few..

How to read a prospectus

A bulky IPO prospectus is certainly discouraging for time-pressed investors. But the document provides comprehensive information on the company. So, to help you along, here are a few tips on how to make use of this document.

First, turn to the information on business and industry, given under “About Us”. It provides a detailed outline of what the company does and how it has grown. Glance through the management’s profile, also in this section, check how professionally the company is being run.

Second, move to the financial summary under “Introduction” for a quick overall idea of how revenues and profits have grown and the size of the company. It will help in comparisons with listed peers.

Third, read the “Risk Factors” provided at the start of the prospectus. Risks are better understood once you know the company’s business.

Fourth, since calculating financial ratios and the like is hard, not to mention time-consuming, flip to the “Financial Information” section. Read in detail the management discussion and analysis provided here as it explains why revenues and costs moved the way they did.

Finally, turn back to the “Introduction” section and read up on the objects of the issue. Armed as you are now with knowledge of the company and its business, you will be in a good position to judge the potential.

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