IPOs in 2011: An Evaluation

IPO activity in first half of 2011 has mainly been a dull affair with no big names hitting the bourses. Although the Tata Steel’s and PFC’s of the world came up with their huge FPOs but couldn’t manage any blockbuster success. The FPOs are not generally expected to spring up any surprises in terms of investor returns, so it is very much in line with the expectations.

On the IPO front, 22 IPOs managed to list on the Indian bourses since January 1, 2011 till date. The following is the list of IPOs, arranged on the basis of Listing Day Returns w.r.t respective issue prices.

Listing Day Returns:

Analysis:

a) The top 5 listing day returns were posted by IPOs which have been either rated as Grade-1 (Poor Fundamentals) or Grade-2 (Below Average Fundamentals) by the rating agencies.
b) 2 of them, Birla Pacific Medspa and Fineotex Chemicals, posted whopping returns of greater than 100% and emerged out as “Listing Day Stars”.

c) Only 2, Grade-3 or Grade-4 IPOs hit the bourses in this time-frame and posted listing day returns of 0.71% and – 11.07% respectively.

d) 10 out of 22 IPOs plunged on their listing day itself. Omkar Speciality had an embarrassing debut, suffered the most with a decline of greater than 50%.

e) 9 IPOs were assigned a grade of 2,5 IPOs were assigned a grade of 1 and 1 of them was assigned multiple grades of (1,2) by different rating agencies.

f) The average grade of these IPOs comes out to be 2 (Below Average Fundamentals), disseminating the quality of the IPOs in a broader perspective.

(For IPOs with multiple grading’s, highest rating taken into account for calculating the average grading).

Returns (as on 14^th -Jul-2011):

 

Analysis: 

a) 4 IPOs have posted returns of more than 100%.3 out of these 4 are Grade-2 IPOs.

b) Fineotex Chemical continues it’s dream-run, posting returns of over 300% as on 14-07-2011.This IPO also had a dream debut on it’s listing day and posted returns of more than 100%.
c) For the rest, dismal performance continues here as well. Only 9 out of 22 IPOs managed to stay ahead of their issue prices.

d) Barring one (Lovable Lingerie) which is a Grade-3 IPO, all of these 9 are either Grade-1 or Grade-2 IPOs.

e) 13 out of 22 are quoting below their issue prices.8 of these 13 have plunged within range of 0 to 50% of their issue prices.

f) 5 IPOs are generating losses to the tune of 50 to 82 percent against their respective issue prices.

g) Acropetal (Grade-3) which had a decent listing has witnessed a bloodbath after that, has plunged the most, 80% below it’s issue price.

Caveat Emptor: IPOs tend to be glamorous but they can be deceiving at the same time. Investors generally park their money in hot ‘new offer’ for 15 days and expect a wonderful ROI upon listing. Though we can’t forget the Coal India and Jubiliant Foodworks of the world but we cannot ignore the other side of the story.

There are good companies available which have potential to grow as well as create wealth for investors. But for riding on the IPO bandwagon, one has to bear some things in mind.

1) Don’t go for Grey Market Premiums as they can be misleading; instead look at the company fundamentals.
2) Don’t go for “Word of Mouth”; instead do some research for the promoter track-record.
3) Have a look at the “Objects of the Issue” and “Future Prospects” and the synchronization between the two.

4) Don’t be allured to the lower tick sizes. A comparison of company’s EPS and P/E with it’s industry peers will give a good idea about fair price of an IPO.