Are investors missing the 'IPO' bus?
Investors in HDFC Bank IPO made 6,980% returns in 18 years. The tales of investors in Infosys' 1993 IPO becoming millionaires is common. That too, assuming they did not cash out during the 2002 tech boom.
Initial public offerings (IPOs) are therefore meant to be a golden ticket to participate in a firms's path to prosperity. However, most companies going the IPO route have not stayed true to this spirit. Many may not be aware that until the early 1990s, IPO-pricing was decided by the Controller of Capital Issues (CCI). The CCI decided that Infosys could make an issue at a premium of Re. 1 (issue price of Rs. 11) in 1993..!
It was only when the then Finance Minister Mr. Manmohan Singh abolished the post of CCI, could Infosys price the issue at a premium of Rs. 86. However, between then and now the absence of a 'controller' for pricing of capital issues has been a much debated subject.
The Reliance Power IPO in 2008 was a classic case of mis-priced IPO. Despite not having a single rupee in revenues the company priced the issue at a premium of Rs. 395 per share! Ever since, company promoters and lead managers have been looked upon with suspicion by investors. Unless the IPOs are attractively priced investors have been wary of losing money in them. Even the lure of listing gains has fizzled out with markets not rewarding speculators with gains on listing of over-priced IPOs.
There is so much negativity about IPOs that the market has almost dried up over the past three years. Very few companies have dared to debut on the bourses during this period. Even amongst the ones that did, just a handful have managed to stay above listing price.
The Big Question is:
Are investors missing the bus by letting go the opportunity of investing in companies at the IPO stage?
Well, we can not resist quoting Buffett's view on IPOs here
"The new issue market is ruled by controlling stockholders & corporations who can usually select the timing of offerings. Understandably these sellers are not going to offer any bargains. It's rare you'll find X being sold for half X. Indeed, in the case of common stock offerings, selling shareholders are often motivated to unload only when they feel the market is overpaying."
Thus it is even more important for investors to judge the moat of the business, the sustainability of profits and management quality of the businesses offered through the IPO route. Since, it is difficult to reasonably evaluate these for a company yet to be listed, it is better to exercise caution. Besides the margin of safety in IPO valuations, investors must be way of future visibility.
Hence we do not think investor concern is in any way misplaced by giving over-priced IPOs a miss. It is a far safer option to invest once the companies prove their worth a couple of years after listing.
Src:
Equitymaster Agora Research Private Limited
103, Regent Chambers, Above Status Restaurant, Nariman Point,
Mumbai - 400 021. India. Telephone: +91- 22 - 6143 4055, 000053 498709
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