04 May 2015 13:39 IST

So, what’s really on offer?

Only half the new issues over the last decade are trading above their offer prices. You could have made more money investing in an index ETF

India’s primary market is beginning to gather steam, with many companies lining up to file their draft prospectus with market regulator SEBI. So, should you take up the offers?

An analysis of the Initial Public Offers (IPOs) made in the last 10 years shows that this decade has not been favourable to investors in the primary market. Of the 515 companies that listed on the bourses in the last 10 years, only half are trading above their offer prices, others are still lingering in the red. This is despite the market trading at its life-time high.

The once hot technology stocks including OnMobile Global and Tanla Solutions are quoting at rock-bottom price. The stock of Tulip Telecom has been suspended from trading. Consolidated Construction Consortium, DB Realty, Everonn Education, Reliance Power, Punj Lloyd, DLF and BGR Energy are a few more that are trading well below their IPO price.

Of the entire bunch, only a third of the companies, i.e., 178 of them, have delivered 20 per cent or more returns since the IPO. Sure, there have been multi-baggers such as Page Industries, Kaveri Seed Company and ICRA, but the probability of your getting lucky enough to pick those stocks was less than one in five. Yes, only 95 of the 515 stocks have delivered more than 100 per cent returns compared to the issue price.

In comparison, investing in a Sensex/Nifty ETF would have fetched higher returns for investors during this period. Sample this:

By investing ₹10,000 in each of the IPOs since 2005, you would have made 72 per cent return on an absolute basis. While you would have invested a total of ₹51.5 lakh till now, your portfolio’s value at current market prices would be ₹89 lakh. On the other hand, had you invested ₹10,000 in a Sensex ETF, every time an IPO was listed, you would have made a return of 85 per cent and your portfolio would be worth ₹95 lakh now.

So, what went wrong with the IPO listings in the last 10 years?

Timing it wrong

Since the demand for stocks is the highest close to market peaks, IPOs generally tend to get clustered at market highs. As the tide turns, these stocks tend to get clobbered in the secondary market.

Almost half the IPOs that debuted in the last 10 years have been offered at the market peaks of 2006-07 and 2010. The stocks took the inevitable hit as the market trend reversed. Consolidated Construction Consortium, Ramky Infrastructure, Tecpro Systems, A2Z Infra Engineering, Porwal Auto Components, Bedmutha Industries and Onelife Capital Advisors are some stocks that were issued at market peaks.

Though the broader market has recovered and is at a new high now, these stocks are still dredging new lows. Take, for instance, Bedmutha Industries. The company came out with an IPO in October 2010 when the Sensex was at 20,497. It listed at ₹179, up from the issue price of ₹102.

Today, though the Sensex is up 35 per cent from there, the stock is down over 80 per cent.

Sector matters

Companies appear to have made a beeline to issue IPOs in a few sectors that were then claimed to hold great promise. As the prospects of these sectors floundered, the IPOs too had to bite the dust. Examples here are IPOs in the infrastructure, communications and financial services sector.

Of the 515 IPOs, 120 were in the infrastructure, engineering and construction space and half of these are now trading below their issue prices. A2Z Infra Engineering, Consolidated Construction Consortium, Ramky Infrastructure, ARSS Infrastructure Projects, Punj Lloyd, GVK Power and Infrastructure have slipped over 70 per cent from their IPO prices.

Most of these issues were made in the period between 2007 and 2010. The slowdown in investment cycle and drying up of the order pipeline since hurt their businesses. Further, with the delays in project completion, the cost over-runs and increase in debt also impacted them negatively.

Many IPOs in the technology and telecommunications space, too, turned out to be washouts. GSS Infotech, Tulip Telecom, Tanla Solutions, Aishwarya Telecom and OnMobile Global are trading over 60 per cent below their offer prices. Aishwarya Telecom, which was hugely oversubscribed (19 times) at the price of ₹35 a share, has fallen to ₹3.80 now; OnMobile Global trades at ₹82, down from the issue price of ₹220; Tulip Telecom, which offered its shares at ₹24 a share, trades at ₹1.53 now.

There are myriad reasons for this ghastly performance — from macro challenges of a weak US/Europe, lower outsourced business to trouble in scaling up the business. Increasing competition and ballooning debt further weighed on earnings.

OnMobile Global, for instance, was a blockbuster IPO in 2008 but ever since listing it has had a tough time.

The weak traction in value-added services business, the drab financial performance of the company and exit of key managerial personnel, including one of its founders that flagged governance issues in the company, hit the stock.

The hitch with Tulip Telecom was the huge debt it had taken to expand and build data centres. The investments didn’t bring as much revenue as anticipated and the company defaulted on its FCCB repayment.

Many stocks in the financial services space too have done the disappearing act. Indo Thai Securities, Inventure Growth and Securities, Emkay Global Financial Services, IndiTrade Capital, GCM Commodity and Derivatives and Edelweiss Financial Services are all trading below their IPO price. The stiff competition, thinning margins and sinking cash market volumes have seen profits of companies engaged in stock market-related businesses come under stress. Those engaged in the commodity broking business found the going difficult, thanks to the NSEL saga. Now, hunting in the list for multi-baggers, we found that agri, e-commerce and retail sectors had more than one star IPO.

Kaveri Seed Company, for instance, has delivered a return of 2,300 per cent from the issue price. Similarly, Advanta, Usher Agro, Just Dial, Info Edge, Page Industries, Kewal Kiran Clothing and Shoppers Stop have risen sharply since listing.

Pricing it right

Many IPOs have bombed due to companies asking for a high valuation not justified by fundamentals. Take, for instance, Reliance Power IPO. The company asked for an exorbitant price of ₹450 a share (current adjusted price comes to ₹281 after bonus) though it did not have even one mega watt of operational capacity.

It wanted to use the IPO proceeds to set up power projects for which even the fuel supply was not tied up and cash flows were to commence only five years later. The stock trades at ₹57 now, down about 80 per cent from the adjusted issue price.

Future Capital Holdings, name changed to Capital First, is another case of an issue with avaricious pricing. The company debuted with an IPO in February 2008 asking for ₹765 a share — which was then 6.6 times price-to-book. The company had reported net loss for the half-year ending September 2007.

With the nascent consumer credit business and an untested business model, it was clear that the company was asking for too high a valuation. Though the stock gave a 19 per cent gain on listing day, it slipped subsequently. The stock trades at about ₹398 now, down 48 per cent from the issue price.

In the case of GSS Infotech and Aishwarya Telecom too, the businesses didn’t do well and the stock prices plummeted because of expensive valuations. GSS Infotech, for instance, asked for a price of ₹440 a share which was 10 times its earnings when many tier-II IT companies which operated on a much larger scale were trading at similar valuations. The company’s US-centric business model with a large base of retail clients and a diffused presence in nine separate business verticals saw its performance go downhill since its debut in 2008.

Governance issues

IPO investors take a greater risk since there is mostly no track record of the promoters. While the business could sound good at the time of the offer, in some cases, governance issues have cropped up later, highlighting this risk. Take, for instance, DLF.

Last year, SEBI banned the company’s chairman and a few other top executives from accessing the capital market for three years as it found that it had concealed material facts during its IPO. The promoter is also alleged to have done irregular land dealings. The stock trades at ₹131 now, down from the issue price of ₹525 in 2007.

Pyramid Saimira Theatres is another case in point. The company’s issue was oversubscribed 16 times in its IPO in 2006. But today, the stock has been suspended from trading by SEBI.

This was due to the company manipulating the stock price on listing day. An order barring the company from the capital markets for seven years was passed by SEBI in 2009.

A more recent case is of Zylog Systems. In 2013, SEBI banned the company’s chairman and a few other top executives from the securities market for false disclosures to the exchanges on shares pledged by its promoters. The investigations resulted in over 60 per cent fall in the stock price between October and November 2012. The stock trades at ₹4.7 now, down from its issue price of ₹175 (adjusted for split) in the IPO in 2007.

The other big names who have seen their stocks lose market value on governance issues include DB Realty (at ₹63 now, down from the issue price of ₹468) due to involvement in the 2G spectrum scam.

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