Monday, November 2, 2009

Upcoming IPOs will you invest ?

“The more dependent the valuation becomes on anticipations of the future - and the less it is tied to a figure demonstrated by past performance - the more vulnerable it becomes to possible miscalculation and serious error.”

- Benjamin Graham


The observation by the legendary investor, in a lot of ways, captures the essence of the Indian IPO (initial public offer) market, which has been a notable victim of price abuse. The incestuous relationship shared by investment bankers and promoters has made a mockery of the so-called price discovery mechanism. A frenzied bull market also acted as a stimulant. For proof, consider this: Of the 286 IPOs from 2004 to September 2009, 184 issues are still in the red. In fact, had things not turned nasty on the global front, the Indian primary markets would have probably ended up raising more than the record Rs 52,219 crore mopped up by 90 IPOs in FY08.

While the last fiscal was a complete washout with only 21 issues managing to mop up Rs 2,034 crore, the inexplicable turnaround since March this year has put the IPO gravy train back on track. Eleven issues have raked in Rs 13,035 crore and, not surprisingly, five issues are already trading below their issue prices. Continuing with the tradition of aggressive pricing, Mahindra Holidays & Resorts was the first off the block in the current fiscal to raise money at 30x its 12-month trailing earnings. Having seen that the world is flush with funds and global investors are continuing to buy the India growth story pumping in over $12 billion since March, the pipeline for new issues is getting longer with every passing day.

As on date, 53 issues worth Rs 31,112 crore are waiting to hit the markets. A majority of these issues are from the realty, power and construction sectors, which have been the biggest gainers in the rally thus far. The list also features smaller companies driven by “first-generation entrepreneurs” looking for capital to “grow their businesses”. For those who are looking for a “gem” of an IPO, the list has also some jewellery makers.

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